Reputation and Context in Social Networks

Posted to http://gov2.net.au/blog/2009/07/27/online-engagement/#comments

Principle 14 – Reputation and Context.
The transmission and accessing of information is more than the transmission of data. It is a communication event. Communication or the transfer of information is a social activity which requires both parties to know the reputation and characteristics of the other party and the context of the communication to be explicit and understood.  When information is to be stored, the reputation and characteristics of those permitted to access it should be established and the reputation and characteristics of the person storing the data should be kept with the data and made accessible.

Reputation

Reputation is defined as The general estimation in which a person is held by the public. For Social Networks to work we must know the reputation of the other parties to any communication. Reputation is attached to individuals but it is separate from identity. Reputation consists of personal characteristics and of the performance of the person in past transactions.

Electronic Social Networks depend for their success on the ability of people to easily share information and ideas with others. The attractiveness of the networks comes from the ease with which people can join and leave groups, and from the ability to remain anonymous if desired. Unfortunately as they become more popular rogue elements take advantage of the openness and pollute the social environment. This pollution takes different forms. Some of these are:

• Bad manners – forums and blog comments can become very confrontational with some people seeming to delight in negative, often abusive comments, attacking others behind the shelter of anonymity.
• Stolen identities – celebrities are a favourite target for frivolous passing-off, but stolen identities can also take a more sinister form particularly amongst vulnerable groups such as those involving children or distressed people.
• Fake identities – these are especially concerning when people pretend to have qualifications or expertise that they do not possess.
• Slander and defamation – where, under the guise of anonymity, people slander or defame others.
• Misuse of the network – people use the network to promote products or services inappropriately.
• Multiple identities – Sometimes people have multiple identities in an attempt to gain an advantage.
• Ill-defined and unreliable information – Some people “spread” rumours, partial, false or incomplete information.

These problems can be addressed if we introduce the concept of responsibility with anonymity. That is, people can participate in some activities without publicly identifying themselves providing they first establish some level of identification with the system and they agree to abide by the rules of the network. The rules depend on the context of the interaction. The context also establish actions that will happen if rules are broken. Examples of possible actions are for the person to be excluded from further activity, an identity shown to an aggrieved party or revealed to the whole community, or it can be given to authorities for civil action to be taken. These actions impact on the reputation of the identity and are reflected in way reputation of the party is evaluated.

It is important in Social Networks for the concept of reputation to be captured and available. It is reputation not identity that is important for the functioning of networks. To that end, identification is unimportant as long as the measures of reputation are reliable and accurate. The level of reputation required for different transactions varies from reputation not mattering to high reputation (which includes authority) being mandatory.

Not all access and activities on social networks are subject to abuse and for those there is no reason for the access to be open and anonymous.

To achieve control, where it is required, we need simple ways for people to identify themselves to a level appropriate to the context of the communication. That level of identity could be displayed on the social network site so that people can see how trustworthy the person is – without revealing who they are – and how trustworthy is the information. The person need not reveal anything about themselves (not even their pseudonym) but there should be mechanisms to provide a visual indication of the trustworthiness of both the government officials and members of the public.

If we are going to permit the public to store information in government files, a person must first establish that their reputation is sufficient to allow the storage of the information. The most common case is where a personal data is stored about a person. The person providing the information must either be the person themselves or a person with sufficient reputation in the eyes of the person who is the subject of the information or a person of sufficient reputation as defined by the government. The reputation of the person storing the information, not the identity, should be kept with the data and made available to people accessing the information. For personal data only the person concerned, or those the person explicitly or implicitly approves, should be allowed to access persona data.

Context

Context is the circumstances in which a communication event occurs. 

There is no point in keeping information if it is never accessed or used. However, not all information should be available to all people at all times. Who should see information, at what time and for what
reason is determined by context. When it is decided that information is to be stored, the context of when and how it is to be released should also be established. This means that the characteristics (including reputation) of the person requesting access should be defined. Also the characteristics of any government official who can access or see the data should be defined.

If this is established at the time of storing data it means that if a person can prove they possess the appropriate characteristics access can be automated and there is no need to involve a government
official. The same access mechanism can equally apply for the public and for government officials.

In many circumstances a government official may be granted access to information that is not available to the general public. In those circumstances the public can ask the appropriate government official to access the information and the official may be able to provide an answer to a specific question without revealing any sensitive details. An example of this could be a researcher wishing to access information
that is of a personal nature but not needing to know the identity of the persons involved.

Social Networks and Identification

Electronic Social Networks are a modern phenomena. They depend for their success on the ability of people to easily share information and ideas with others. Their attractiveness comes from the ease with which people can join and leave groups, and from the ability to remain anonymous if desired. Unfortunately as they become more popular rogue elements invariably try to take advantage of the openness and pollute the social environment. This pollution takes different forms. Some of these are:

• Bad manners – forums and blog comments can become very confrontational with some people seeming to delight in negative, often abusive comments, attacking others behind the shelter of anonymity.
• Stolen identities – celebrities seem to be a favourite target for frivolous passing-off, but stolen identities can also take a more sinister form particularly amongst vulnerable groups such as those involving children or distressed people.
• Fake identities – these are especially concerning when people pretend to have qualifications or expertise that they do not possess.
• Slander and defamation – where, under the guise of anonymity, people slander or defame others.
• Misuse of the network – people use the network to promote products or services inappropriately.
• Multiple identities – Sometimes people have multiple identities in an attempt to gain an advantage.
• Clues to reputation – We always make choices on what to read and with everyone potentially contributing we need mechanisms so that we can focus on those we think are likely to be worthwhile reading.

These problems can be addressed if we introduce the concept of responsibility with anonymity. That is, people can participate in some activities without publicly identifying themselves providing they first establish some level of identification with the system and they agree to abide by the rules of the network. If they break the rules then they can be excluded. Their identity may be shown to any aggrieved party or revealed to the whole community, or it can be given to authorities for civil action to be taken.

Not all access and activities on social networks are subject to abuse and for those there is no reason for the access to be open and anonymous.

To achieve control where it is required we need simple ways for people to identify themselves to a level appropriate to the task or content of the site. That level of identity would then be displayed on the social network site so that people can still see how trustworthy the person is – without revealing who they are. The person need not reveal anything about themselves including a pseudonym.

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A Banking Product for Investment in Renewable Energy

Two ways of increasing investment in greenhouse gas (ghg) reducing technologies and practices are:

1. Raise the price of energy from fossil fuels and so encourage investment in non polluting production of energy.

2. Decrease the capital cost of investing in ways to reduce greenhouse gases.

Of the two, the second will be the most effective, the fastest acting and the most certain. This is because it is comparatively easy to estimate how much investment is required to reduce emissions.  And because we can easily reduce capital costs by removing interest payments and only requiring repayment of capital when the investments earn money.

Let us form a slightly different banking enterprise — one that takes deposits and give loans, but which only gives loans to those people making deposits.  Moreover, let’s make the size of the loan dependent on the size of the deposit and stipulate that the deposit must remain with the bank until the loan is repaid. There is no interest paid on deposits or on loans.

This form of banking fits easily with Islamic Principles.

 

The loan the person is allowed to receive is up to the fractional reserve permitted for the bank. If the fraction is 10% then a $1000 deposit allows for a loan of $9000. The loan incurs no interest and the repayments come from the money earned from the investment. Where possible, for every $1 earned 50% is repaid and 50% is kept by the borrower. The loan repayments continue until the loan is repaid.

The loan however, can only be invested with approved investment opportunities that reduce the level of ghg concentration in the atmosphere. This could be investments in building solar energy plants, insulation in a house, investment in a windmill to generate energy or installing a geothermal heat pump. 

These investments will earn a return to the borrower or save the borrower money. When money is earned or saved then the borrower will get a return and also pass on 50% to the bank.

Investments that save energy and hence money – such as insulation – may be repaid on an installment basis. An estimate will be made of the energy savings and from this the energy cost can be calculated. The borrower will agree to repay the loan at regular rates based on keeping 50% of the savings and returning the other 50%.

 

In the case of an all electric vehicle powered with renewable energy the individual receiving the loan it is suggested the loan be repaid over a period of 10 years.

Once the loan is repaid then the original deposit is available for withdrawal.

The banking organization charges a transaction fee for loans made to the client and for transaction fees to merchants being paid. It is estimated that initially this will be of the order of 5% of money through the system. This is much less than the current system of charging interest on new money every day as well as loan fees and other transaction fees. The bank does not need to receive interest on the loan because it pays no interest on deposits.

 

If the bank lends $1billion dollars then the transaction fees will be $50M.  

What are the differences between this system and other banking products?

The first difference is that no interest is paid. However, the main difference is that the expenditure of the money and the return of the money are controlled. Money must be spent on new productive assets that reduce the level of ghg concentrations in the atmosphere and cannot be spent on consumption (things that do not earn or save money) or things that already exist such as an existing company.

This does not stop existing banks lending to purchase existing assets but it makes it difficult for them to compete against banks targeting investment in new productive assets (such as new banks specialising in investment in renewable energy).

 

This form of banking can be used for any productive purposes. It will NOT cause inflation provided the bank only loans for revenue-generating or revenue-saving purposes. The reason is that the money generated can be used to purchase the goods or services produced by the investments. General inflation occurs when there is not enough goods or services available for purchase.

The bank takes NO RISK because it keeps the deposit if the loan is not repaid and the loan is simply written off. All the risk is on the part of the borrower. This means any organisation with a license can run such a bank if it gets a license. This means community groups can run their own banks if they only use this banking product.

It is important that this banking product NOT be used to purchase already productive assets such as existing factories. The reason is that because it is so easy to borrow money the price of existing assets will rise too rapidly and there will be asset inflation. Existing assets should be purchased with existing money through the same loan process. As there are more existing assets sold than new assets created this will make little difference to the existing banking business which can continue as it does.

Controlling Loan Expenditure and Return of Money

For this banking product to work there has to be tight control over the expenditure of loan money and there have to be guaranteed ways for the money to be returned. This is done through simple contracts and by the bank giving the money under instruction from the borrower to suppliers. This means there is a tight integration between the loans and the supplier systems. 

The contract with the borrower is that the money is only available for expenditure through suppliers who have contracts with the bank. Suppliers must give the loan holder complete online access to their accounting records to verify suppliers expenditures.

The contract with the suppliers is that the money must be spent on new renewable energy infrastructure and must not be spent on purchasing existing goods and services. They must estimate the amount of ghg  emissions the investment will save and work with the borrower to monitor and report on the amount of ghg actually saved.

 

If borrowers are found to purchase goods and services that do not reduce the level of ghg in the atmosphere then they will not be permitted to borrow from the bank again and must repay their loan within three years.

If suppliers are found to sell goods and services where their estimates of ghg saved are significantly less than their claims, then they will not be permitted to accept new borrowings through the bank.

To stop loans being used to create “extra” money for the same investment if a borrower sells the asset they have purchased with their loan they must immediately pay off the loan.

Statistics and Control

Compliance is achieved by making the investments transparent and accountable. To that end all loans will be monitored in real time by the borrower.  In particular the total amount of ghg saved and the cost per saving will be visible to all to see. These figures will be published and be made available to prospective borrowers to help them choose their purchases.

People without existing assets

Some people do not have any money they can risk in order to get access to these loans. For those people the government could consider providing funds as the deposit for the loan. Of course the government may decide to issue all stimulus packages this way and allow individuals to sell their loan deposits to whomever wants them.

Bank System Components

The bank system will need

 

• An identification system to enforce compliance
• A website to sell goods
• A website to give loans
• Specialised websites for different suppliers
• Specialised systems for analysing supplier accounting records

An example of a specialised website is the website for investment in companies. Loans may be used to purchase equity or bonds in companies or organizations that build or produce systems that reduce ghg emissions. A typical example would be a solar thermal power station. The funds could be used to build parts, or to put together other parts of the system.  The funds cannot be used to purchase existing operating plants.

Incremental Development

Not all systems will be available when the system is launched and there will be limited suppliers.  While the contracts will be in place not all components – such as monitoring accounting records – will be initially present.

The initial products will be simple as with the website used to offer loans and where suppliers will offer their goods and services.

Funding the Software Infrastructure

The software infrastructure can be funded through the bank. That is, one of the investment projects offered via the bank will be to fund development of the system that  runs the bank. 

 

A Relationship Model of Identity

Identification is a critical component of Web 2.0. Electronic communication between parties cannot take place unless both parties can be certain of the identity of the other party.

The current model of identification on the Internet is identification by data. We identify people by what we call them, whether it is a given name or an identifier like an id number. 

However, in real life we are not identified by name but the relationships we have both with other people, organisations, or things within our nvironment. Our identities are us and our relationships with other objects – not our labels. Another way of describing it is that we are identified by our presence in space and time.

Edentiti is an approach that models real life in the electronic world. Edentiti allows us to create an electronic presence. It is a presence not a name and we call it an edentiti. It has relationships of differing types with other electronic presences on the Web.

In real life we have many identities and we take on different roles for different circumstances. We have an identity for our relationship with our family and friends, when we represent an organisation or when we want to identify ourselves. Whenever we want to interact with others in real life we “announce” our identity by our presence in some form or other. Edentiti gives us a way to announce our presence in electronic space and announce the role we are taking be it family member, or policeman, or teacher, or financial advisor, or member of a P&C.

Each edentiti has a one to one mapping with an identity in “the real world”. The real world identity has control over the online edentiti.

The edentiti we have first implemented is an edentiti to help us identify ourselves so that organisations in Australia can comply with the Australian anti-money laundering/ Counter Terrorism Finance legislation (AML/CTF). We have called this edentiti GreenID.

The AML/CTF legislation was written with the model of identification by name in the mind of the framers of the legislation. The legislation is written so that it says an organisation can  electronically identify a person if the organisation can show that person being identified has two existing relationships with independent organisations who know us by name and address and another organisation who knows us by name and date of birth. If an organisation can show that they have established these name based relationships then the organisation has “safe harbour”. Safe harbour means that the organisation cannot be sued for a misidentification resulting in disclosing suspicious transactions to the Austrac authority.

greenID works within these rules.

How does the greenID edentiti verify whose presence it represents? It does this by verifying that it has electronic relationships with organisations or people. It asserts that there is a record in the tax office about the identity it represents. It proves it by asking the tax office electronically – I have a tax file number of x, a name of y, and a date of birth z. Do you have a record of me? The tax office, like all organisations in Australia is required by the privacy principles to say yes or no for no cost – except in some very exceptional circumstances.

greenID gives the real person the ability to ask these questions and to securely record the result of the question. The data used to obtain this verification is discarded and only the verified relationship stored. 

As individuals we keep control of our own edentiti by establishing ways we can prove we are the real person the edentiti represents. We do this by leaving biometrics with our edentiti that identifies us. This could be passwords, secret questions, voice prints, iris scans, pictures of ourselves, phone numbers from which we call, computers from which we communicate. When we return to use our edentiti we establish who we are to the edentiti and we then ask the edentiti to do things for us.

This model allows us create many edentities for different purposes. We may have our scholastic record edentiti. This asks all the organisations with whom we have studied to verify that we have a particular qualification. Once we establish the link with an organisation then our edentiti can ask for a copy of the record to be delivered securely to say an employer.

We might establish our health edentiti. Our health edentiti keeps track of the all health relationships we have and where we can find information about our health. It does not keep any health records but it keeps where health records are kept and keeps the authority for our edentiti to access those records and deliver them to others when requested.

We might establish a guardian edentiti who watches over our other edentities and sees if anything unexpected happens.

Any sort of electronic presence we want for any purpose can be established.

For this model to be deployed for Government 2.0 the government only has to enforce existing laws that allow an individual to ask any organisation that might hold records about them a simple yes or no question. Do you hold any information about me?

This model can be implemented tomorrow for a very low cost. Instead of the government spending a reported $400M establishing and deploying a health id card all the government has to do to allow an individual to consolidate their health records and supply them on demand in a medical emergency is to enforce its own regulations.

I do not have time within my five minutes to explore the ramifications of this model. Suffice it say that it will stop identity theft, make Government 2.0 easy and cheap to implement, do it all in a privacy friendly way and do it without any legislation, new regulations or new government bodies.

A strategy for investment in innovation

The government’s response to the Global Financial Crisis has resulted in a vigorous debate regarding appropriate levels of government debt and whether debt is a burden on future generations. This paper proposes a way for the government to stimulate the economy through funding innovation and investment in areas that historically have had difficulty attracting private investment funds. The proposal outlines how to achieve this without the government going into debt.

I have spent many years raising small amounts of money for investment in innovation. Here are my observations on why public investment is important and why private investment for innovation is difficult to obtain.

The aim of innovation investment is the production of the same goods or services at a lower cost, or the introduction of new goods and services that did not previously exist. Innovation drives wealth accumulation. Some people call it productivity. I prefer to call it innovation because productivity improvement is a subset of innovation that does not include the creation of new goods and services. Innovation/productivity also drives wealth destruction when processes that were once profitable become obsolete.

If you have an innovative idea it is difficult to convince a bank or superannuation fund to invest in that idea. In fact you will be hard pressed to find any fund manager willing to invest in an idea. This is because they do not care whether an idea is innovative or not, nor are they interested in how much money an idea will potentially earn. Their main concern is whether at some time in the future their money will be returned along with some interest. This means that most finance institutions require you to first have assets that can be “mortgaged” against the loans.

The response will generally be the same amongst all bankers, including the merchant bankers who are supposed to be in the business of lending for innovation. A merchant banker’s main incentives (or payments) come from making the deal, not from profits earned by the investment, so they tend to favour the tried and true and look for the least risky option.

You would think that successful companies would be the main drivers for investment in innovation but they are constrained by “The Innovator’s Dilemma” so well described by Claytton Christensen in his book of the same name.

So who are the people who fund innovation? When it comes to individuals, the main funding sources are the rich who have become wealthy through their own innovation. Yet even this group tends to only risk small amounts of money as they try to preserve what they have. Unfortunately in Australia there are relatively few people within this group as most wealthy people achieve their wealth through property investments, inheritance, or by taking advantage of public and private monopolies. 

For small companies who are yet to be profitable there is another source of funding – the government through its R&D tax credit scheme. However, funding innovation this way will not raise the large amounts of money needed to introduce new technologies that will address problems such as climate change, secure water supplies, build broadband networks, create efficient public transport networks, invest in education etc. The initial funds needed to address these problems will not come from Australian private companies or individuals. Funds will come once innovative approaches have been proven to work and are profitable with low risk but the funds to get innovative processes to this stage are difficult to obtain.

An alternative way

Funding innovation is risky and it does not always work. This is something that risk-averse governments are well aware of and it is the reason why governments so often put all their investment “eggs” into one basket, or favour existing players.

 

One solution to the problem is to fund the innovation in such a way that the entire community bears the risk. For example, use public money but give that money to the population (or at least to a large number of people) and require them to invest in ways of producing goods and services that address particular problems. This brings the market place – which is a good conduit for allocating resources – to investment in innovation.

This paper proposes that we invest public money by giving the funds to the population and requiring them to invest in the infrastructure to provide goods and services through an investment market place. The risk of failed innovation is thus spread. The funds can be raised by taxes, surcharges or even by increasing the money supply via the issuing of funds. Some people will make good investment decisions while others will back duds but they will all invest because that is all they can do with the money. People are not risking their existing wealth so they will not feel quite so bad if they lose their funds because in a sense they never had it – and they can always eliminate their risk by selling their investment money at a discount to someone who is prepared to take the risk.

Although special investment money is given to the population as a whole it is expected that brokers (fund managers) will do the investing.

To see how this can be done, using the example of funding the National Broadband Network,  visit

 

http://stableproductivemoney.wordpress.com/2009/06/12/submission-to-national-broadband-network-greenfields/ 

If we use this approach it is unnecessary to create public debt to get Australia through the GFC and beyond. Debt is about who owns things. It is not about wealth creation. If we have public debt what does that mean? We owe money to other members of the public, be it in Australia or elsewhere. Debt is a zero sum game while growing the economy is a non zero sum game. We have let the mechanics of debt (or who gets ownership of the results of investment) cloud our view of what is important for wealth creation – innovation. What we need to concentrate on are the mechanics of encouraging innovation or new wealth creation through investment markets where there are many people investing for particular purposes and where the wealth is then widely distributed.

That is what the current system is supposed to do and it has worked well for some. What is proposed is an innovation in how we, the community, invest public monies for the public good and where debt is not the mechanism used to fund innovation.

Financing the National Broadband Network

The cost of last-mile access infrastructure is a major hurdle for broadband network suppliers around the world. Ideally the investment would be supported through the margin on the services provided over the network. However, in practice the capital cost of establishing the network must frequently be written down before the services can become price competitive.
TransACT is an example of the latter – writing down of the capital investment. I was one of the original investors in TransACT and for the service to be price competitive the value of my original shares had to been written down to near zero. TransACT has since become a viable operation, but only because the capital cost of the infrastructure has been largely removed. The reason that the capital costs were so high was because TransACT only supplies a percentage of the total high-speed communication services used within its network “footprint”. If all dwellings in the area that required broadband used TransACT the capital burden per dwelling would decrease and the write-down of my investment would have been less.
With the National Broadband Network (NBN) the capital cost of building the network may be higher than the wholesale charges can reasonably support. That is, to cover the capital cost of the Network either the investors are going to write down much of the value of their investment or the wholesale prices will have to be so high that the takeup rate will be low, which in turn will increase the price of services – fuelling a vicious cycle of failure. As in many areas, there is difficulty in funding vital infrastructure projects that benefit an entire community. It is not easy to measure the flow-on benefits of a widely-used service and even if it were possible, individuals tend to be unwilling to pay for them.
To solve this problem and to ensure the system achieves wide takeup, the wholesale price of broadband will have to be kept competitive with the cost of the existing copper network.
One way to achieve this is for the Government to fully fund the NBN. This would result in the building of the network plus an asset that the government could eventually sell. Governments however have little appetite for such ventures as they are invariably difficult to administer. What tends to happen instead is that governments form a quango to achieve an objective. While these bodies have proven successful in some instances, it is a strategy that is unlikely to succeed for the NBN. Australia has already been down that path with the Postmast-General’s Department, Telecom and ultimately Telstra. In the long run it was a strategy that proved ineffective in keeping up with developments.
An alternative approach is to seek private investment and to match those funds with money provided by the government. This will reduce the capital cost to investors to a level that allows a commercial return whilst still ensuring that broadband pricing remains competitive. The main problem with this approach is that it is unfair in that it delivers a publicly-funded subsidy to private investors who are a minority of the community (often they are not even members of the community), and it is difficult to control the level of the subsidy.
There is a third way that will keep the price of broadband low and which avoids the issue of subsidies to private investors. It involves the government giving part ownership of the NBN to the entire participating population: (existing broadband users and others willing to commit to using the service when it becomes available in their area). Government money is provided on condition that the funds are spent building fibre to the home (FTTH) infrastructure or equivalent. In other words, the individuals receiving the money use the funds to buy equity in a company such as Telstra, Optus, TransACT or any other NBN-approved organisation. These organisations in turn are required to use the invested money to build the FTTH or equivalent infrastructure.
The price of a broadband connection should ideally be fixed and uniform throughout Australia. Australia could be divided into geographic zones and companies can purchase rights to those zones through a competitive bidding process. The NBN would fix the wholesale price of broadband connection. Bidders would have some limit on the amount of investment they can receive from the FTTH investing public – perhaps related to the number of people in the zone and the size of the zone. When bidding for a zone the companies would be allowed to make negative as well as positive bids. That is, for an area that is difficult to service the bidders might require additional funds from the NBN rather than giving the NBN funds. If the NBN sets the wholesale price at the right level, funding received from bids for the easy-to-service areas will finance the subsidy required for expensive areas.
Under this scenario the money invested in shares may give the public investors who received FTTH dollars a lower return than might be expected given the notional value of the shares. That is, if $x of money is given to a person who signs up for broadband then the shares they purchase may only be worth a fraction of $x on the open market.
However, those signing up for broadband will end up owning part of the NBN infrastructure through the companies appointed to build it in each region. The people who sign up are the ones who ultimately pay for the network through their cost of the services they receive. (It is similar to mobile phone operators who give away phones if people sign up for a service plan). People can either keep their shares or sell them. The price of the shares will establish the subsidy being given to build the network. Given that the network will last for a long time and the wholesale supplier will continue to receive an income, the returns on the infrastructure (either through lower prices or through profits) will sooner or later cover the total cost of the money received.
Many companies will compete for investment funds but they will only be eligible for the funds if they agree to supply broadband to all the dwellings (and businesses) in a particular geographic area. This brings more competition into the system. Companies would bid for geographic areas. Money collected from these sales would be returned to the NBN and used to subsidise geographic areas where the bidders require extra money because of difficulties or high costs in supplying FTTH (or its equivalent) within that zone. Companies purchasing a geographic area will also be required to agree to provide everyone in their area with FTTH within a reasonable time when requested.
The money given to the community will create an asset that in the long term returns more money than is invested. This means the money need not be borrowed by the government or collected as taxes but simply supplied as funds. This is an alternative way to increase the supply of money instead of the government selling bonds. It allows the government to reduce the amount of bonds it sells so that the money supply does not expand too rapidly. It is non-inflationary because the money is spent on a productive asset and the increase in the money supply can be reduced by the government cutting back on bonds or by increasing the fractional reserve requirements of Authorised Deposit Institutions.
The effect of giving people money to purchase shares in companies that supply infrastructure and of obtaining commitments to use broadband when it becomes available will be to increase demand for the service which in turn will reduce the cost.
It will not be necessary for people to be initially connected to get the funds. Anyone who asks for funds will receive them and the amount will be the same for each person (including children). The reason for requiring people to apply for funds is to prevent individuals from receiving more than one issue of funds and to build a committed user base for the service. People are free to decide that they do not want to use the NBN, but if they apply and receive funds they will be obliged to use broadband for communication purposes as soon as the network becomes available in their area.
The approach will be politically acceptable to the electorate. If a person does not want to participate there is no compulsion for them to do so. If everyone in Australia has the same opportunity to receive the same amount, the subsidy remains equitable.
It is likely that private companies will be formed to supply a particular geographic area. It is also possible that Telstra may sell its infrastructure to those companies which succeed in winning an area. A secondary advantage will be that the funds will act as an immediate stimulus to the economy because many people will not wish to hold shares for the long term and will instead choose to sell their funds or shares as soon as they have received them.
To protect the integrity of the system there would be a requirement that the money invested through the companies MUST be spent on new infrastructure and not on operating the system. In addition, companies would be required to give individuals shares in return for the money – not bonds or other forms of non equity.
The system would be relatively simple to implement as the government only has to provide the rules, the funds and ensure that private companies deliver and deploy the system according to the rules. The total system – including distribution of money, share investments and accounting for the sales of the shares – requires information systems and services that could be readily supplied by private companies. These private organisations could also be eligible to receive investment funds from participants providing they give shares in their companies in return.
In summary the “third way” of funding broadband FTTH could be financed without the government going into debt. Existing infrastructure would be utilised where practical. The system will apply to greenfields and brownfields. Every dwelling that wanted broadband would receive retail services based on the same wholesale costs. The system would have competitive tensions through the market in infrastructure funds and the bidding for geographic areas . This will ensure the most efficient use of funds and the ownership of the resulting assets from the use of the funds would be distributed equitably throughout the community.

amasset – a new economic tool for managing the economy

Amasset is a new word to describe the investing of newly printed money to produce community assets for a specific community purpose. The purpose may be supplying a community with water, reducing greenhouse gas concentration in the atmosphere, building an urban transport system, supplying a community with a sewerage system, or any other form of infrastructure spending that benefits a whole community. The money is to given to many individuals who may already be contributing to solving the community issue. The money must be invested by individuals on the community purpose but it must also directly benefit individuals. 

In most economies the money supply is increased by banks lending money without having any money on deposit. There are limits on how much money a bank can create this way. This is determined by the banks being required to keep an amount of money with the Reserve Bank. This process is hidden and confused because as soon as a bank creates extra money it appears in the borrower’s bank account. Also the reasons for giving a loan are the same whether the money already exists or whether it is newly created money. The reason this approach to creating money is seen to be a good idea is that the loan has to be repaid. This means that the borrower is likely to use the money to good advantage and will not risk other assets mortgaged against the loan. This approach works because some of the loans made will turn into new productive assets that will back the loans made with new money. Unfortunately it makes an economy vulnerable to booms and busts.

An amasset is another way of increasing the money supply without creating a loan. Instead of the banks creating new money, the government creates new money and gives it to people but with the requirement that the money will be invested to produce a new productive asset.

Examples of amassets

• An amasset to reduce greenhouse gas concentrations in the atmosphere would be to increase the money supply by some amount and distribute the increase in inverse proportion to the amount of mains electricity consumed by an individual at their place of residence. The money remains interest free until it is spent. The individual is free to invest the money with any supplier of goods or services who can prove that investing in their product or service reduces the level of greenhouse gases in the atmosphere.
• An amasset to supply a country with a communications network would be to fund company builders of infrastructure with newly printed zero interest money. The money is distributed to individuals in the community as shares in the companies. Individuals would receive shares in inverse proportion to the level of their home connection at some point in time.
• An amasset to build education infrastructure would be to supply individuals who are currently enrolled to study with funds that must be spent on infrastructure to supply educational services.

A country can decide on its priorities for building community infrastructure and each amasset targets a particular area of investment. The system works because individuals will try to spend their money to their best advantage. If an individual does not want to spend their funds they can sell them for whatever the market will give them. This gives the authorities a measure of how much money can be spent to good advantage within each amasset.

Other system advantages arising from amassets

The approach has other advantages and can be used to prevent asset bubbles, remove inflation from the general currency, redistribute wealth to the most needy, and reduce the likelihood of recessions and depressions. 

• Because the methods of increasing the money supply are heterogeneous this reduces the risk of asset bubbles. When an asset bubble appears an amasset can be used to defuse the bubble by supplying funds. For example, if a housing price bubble appears funds can be given to people who are willing to invest in a new dwelling. 
• The system is non inflationary because if too much money is issued for a particular amasset then those funds will inflate in value rather than the regular currency inflating in value.
• A criteria for distribution of funds for a particular problem – such as funding transport infrastructure – could be the level of assets possessed by individuals.  This increases the wealth of the poor while not affecting the wealth of the rich.
• Recessions and depressions should become a thing of the past because money for investment can always be made available. Periods where the banks are unwilling or unable to lend need not arise. Interest rates on money for investment will tell authorities when extra money is needed.
• There is a limit on the amount of money we need to invest in community infrastructure. For a given purpose we can make good estimates on the resources we need to allocate to resolve an issue. We can tell when a community purpose has been resolved and so we can evolve the economic development of society.

The underlying reason why amassets work

Market based economies are efficient ways to distribute resources to get the best value for money spent. Problems arise because the monetary system is too homogeneous. By making money (resources) easily transferrable we have introduced system instabilities as money rushes from one area to the another as opportunities arise. Restricting some money to specific areas stabilises the system and allows it to adjust slowly under our control. An amasset is a mini market economy and it distributes resources efficiently while meeting its reason for existence. Once its objective is achieved the amasset can be disbanded and removed. This brings diversity, adaptability and evolutionary development to economies.

Amassets introduce diversity into economic systems. Diversity is an important control mechanism for any complex adaptive system. An example that illustrates this comes from the behaviour of a colony of bees. Queen bees are promiscuous and mate with many males. This brings a small amount of genetic diversity in the behaviour of the queen bees offspring. This in turn leads to small behavourial changes in the way bees react to changes in temperature of the bee hive. Read a short summary at http://nationalzoo.si.edu/Animals/Invertebrates/News/bees.cfm. Amassets introduce diversity into an economy with similar stabilising effects on the whole economy.

IMF report

The recent IMF Report predicts China’s growth will be 6.5% in 2009 while the advanced economies will drop by -3.8%. This is a huge difference.

China’s growth is holding up because the Chinese government control the money supply. The rest of the world is in a mess because the banks have created too many loans for non productive purposes. The banking system adjusts itself by reducing lending until the bad loans are removed from the system. This slows economic activity. The IMF suggests stimulus packages to put money into the system. Unfortunately governments – except the Chinese – still use the same mechanism to increase the money supply that got us into the mess. That is, governments increase the money supply by allowing the banks to lend money, they do not have, back to the government who now spend it on stimulus packages. 

There is a better way. We can increase the money supply by the Reserve Bank giving money to the general population but requiring the money be invested on productive assets. We have two obvious candidates where we need to invest massive amounts of money. One is investment to reduce ghg emissions and the other is the National Broadband Network. The government can tell the Reserve Bank to increase the money supply by issuing money, giving it (not loaning it) to the population and requiring the money be invested in ways to reduce ghg emissions and in the Broadbank Network. 

A way for the government to fund the broad band network

The government can fund the broadband network and give the economy an immediate stimulus without going into debt.

To do this the government issues every citizen in Australia with shares in the new Company with a face value of $2500. Anyone who wants the shares registers to obtain them. Many people will keep them and many people will sell them for whatever the market will pay them. Probably most will sell. This will create an immediate stimulus to the economy. The company will have a large amount of shares and when it needs some funds it will convert some of the shares to cash by asking the Reserve Bank to issue it with zero interest new money. This increases the money supply but only as assets are created to back the money. Because the money in the company will be spent on producing an earning asset this will not be inflationary. Thus the government can at one stroke solve the ownership problem of the new company, not go into debt, stimulate the economy, and solve the broadband infrastructure.

This is a variation on increasing the money supply as explained in http://stableproductivemoney.wordpress.com/2009/04/03/increasing-the-money-supply-without-loans/

The whole idea of the broadband network is to provide infrastructure at a reasonable price for all Australians and if you remove the capital cost of the broadbank infrastructure then the last mile becomes very cheap. This means we can have broadband at very low prices which will increase productivity (and taxes) because the price of communications will drop.

If the last mile is already in place, such as in Canberra with Transact, then those assets can be purchased from TransACT with shares in the new broadband company. Similarly Telstra in those places where ducting to the home is available can be given shares of equivalent value. This would accelerate the introduction of broadband through existing Telstra as they will make the ducts available otherwise the NBN will do it in parallel.

As long as the broadband company ONLY owns and builds infrastructure and does not get into selling what is sent along the wires then this will give us the worlds cheapest communications infrastructure with all the economic benefits that will come from low priced communications. Giving shares to both the general population and to those whose assets can be used as part of the network is the fairest way of dividing up the ownership of the new asset created by through increasing the money supply.

Where is the downside? Well the company initially will NOT make 10% or whatever rate is deemed necessary for people to invest existing money to build the network. Perhaps the profit can be set to be at the percentage productivity improvement for the country as a whole and prices set accordingly? So as productivity goes up so the return goes up and prices go up. As productivity goes down so prices go down. If we believe (as I do) that a NBN will increase the productivity of the nation this would seem to be a sensible regulatory mechanism to contain the monopoly that will ultimately evolve. What this means is that the nominal value of shares of $2,500 will be lower. That is the share price will be perhaps $1500 but this does not matter because people were given the shares for nothing.

Online Opinion Article

Governments around the world are faced with the problem of stimulating their economies. The most popular approach is to borrow money or use reserves of cash, give people the money and hope that they spend it. The British have decided to print more money and for the government to buy assets.

There is another way. The government can take advantage of the crisis to reform the money market and at the same time, reduce the deficit, reduce the cost of energy, and reduce the levels of greenhouse gases in the atmosphere. All this can be achieved by changing the way we increase the money supply. While this article suggests a way of spending the increase in money, its main purpose is to describe a better way to expand the money supply by investing money rather than just spending it.

First some background to how we currently expand the money supply and an alternative to the existing method. You can read another description on ABC Perspective http://www.abc.net.au/rn/perspective/stories/2008/2448111.htm.

Money is a government promise to pay the bearer an amount shown on the currency. A loan is a promise by an entity to repay money that is given to the receiver of the money. The people who loan us money want us to repay it and before they give it to us they seek assurance that it will be repaid. Therefore loans are secured against assets such as gold, money, buildings, future wages or other loans. In a growing economy we need to increase the amount of money available, so we create some loans with the promise that the issuer of the currency will repay the loan. This is the way we increase the money supply. The issuer of the currency allows some institutions to issue loans without there being any tangible asset against which to back the loan.

Money is not the same as a loan yet the way we have built our financial system money and loans have become the same because we allow some loans to be created without there being an asset backing the loan – only a promise by the government to honour the money. When we allow loans to be created that are only backed by the promise of the controller of the currency, it is almost inevitable we will spiral into a system where too many loans, and with it too much money, is created.

When this happens the system adjusts itself by decreasing the value of money – inflation – or by loans defaulting. When loans start to default on a large scale, both money and loans are removed from the system and we end up with fewer assets against which to loan. The inevitable result of this is a recession or depression, further accelerating the rate at which loans default.

The way we currently expand the money supply involves internal positive feedback mechanisms and it is these which cause our money market to be structurally unstable. In other words, when money supply increases it tends to keep increasing and when money supply decreases it tends to keep decreasing and the price of money has little effect on the rate of increase or decrease.

What is needed is to change the way that the money supply is expanded so that we can stabilise the system and remove the positive feedback mechanisms. What is proposed is that we build productive assets first, then create the money backed by these new assets. This contrasts with the current system under which we produce the money first, followed by the asset.

Is this reversal feasible? Yes, if we create special purpose money that can only be invested in creating productive assets and which can only become interest-bearing regular money after the asset has been produced. The creation of this special purpose money does not require the issuing of loans, and because it results in the establishment of a productive asset the inflationary pressures are controlled.

Getting started 

The first step is to select a class of productive assets to create. The next is to issue the special purpose money to those who agree to invest it in that class. The class of assets needs to be something society wants and that is guaranteed to return more money than is invested. For example, assets that reduce greenhouse gas levels in the atmosphere are something that society wants. Furthermore, if we remove finance charges such as interest and repayments, greenhouse gas reducing technologies will return good profits or more money than we invest.

Here is how it can be implemented.

We create a supply of special purpose money that has zero interest and that must be spent on ways to reduce greenhouse gas levels in the atmosphere. Let us call this money Energy Rewards. Energy Rewards money pays no interest.

We create a market place where suppliers are invited to offer goods and services that reduce the level of greenhouse gas emissions in the atmosphere. This market place will have goods such as house insulation, solar hot water heaters, solar panels, smart metering systems, investments in renewable energy plants, investments in ways to fix carbon, and so on. Any supplier can offer their goods and services provided they can show how the sale of their products will reduce greenhouse gas emissions. Buyers in this market place can use regular money or they can use Energy Rewards. When they pay with Energy Rewards the supplier receiving Rewards converts it to unrestricted money when the product purchased is delivered to the buyer.

Because we invest Energy Rewards in a market place it is likely that Rewards holders will seek ways to invest for the greatest profit. That is, the allocation will be efficient. Who is issued with Energy Rewards is a political decision as it is a wealth allocation issue not an economic issue. If too many Energy Rewards are issued, the Rewards themselves will reduce in value but because their expenditure still produces a productive asset they isolate the regular currency from inflation.

To summarise we can change the way we expand the money supply by creating assets first, then money. This removes the present, unhealthy positive feedback mechanisms from the money market thus helping to prevent over-expansion and over-contraction of the money supply.

The government can stimulate the economy by spending money through special purpose markets. The idea of using special purpose, internally regulated markets to implement particular policy objectives is one that I have promoted for several years through On Line Opinion.

“Contingent loans to reduce taxation and reduce greenhouse gas emissions” http://www.onlineopinion.com.au/view.asp?article=8477 shows how to give extra resources to the less well off without increasing taxation.

“The credit crunch and how to solve it” http://www.onlineopinion.com.au/view.asp?article=7973 has another description of creating assets then creating money.

“A new way to fund health” http://www.onlineopinion.com.au/view.asp?article=6741 describes how to distribute money for health through a market.

“Reward the frugal and charge the profligate” http://www.onlineopinion.com.au/view.asp?article=7085 describes a way to encourage people to consume less and to turn our society from one based on consumption to one based on sustainability.

“A different approach to funding transport” infrastructure http://www.onlineopinion.com.au/view.asp?article=3625 has some early ideas on funding public transport

All these articles are variations on the same idea; using internally regulated market places as a way to spend community money. In devising these schemes a central issue was always one of obtaining the money to fund the buyers in the market places. It turns out that the funding can be provided by using these market places as a way to expand the money supply without the government going into debt.

While it seems counter-intuitive that we can get something for nothing, that is the magic of investment. When we invest we expect to get back more than we put in. This approach can be used by the community as well as individuals. If the government starts to think like an investor and uses the appropriate tools, they can stimulate the economy, so that as a community we all become investors and increase our collective wealth. It’s a much healthier approach than becoming borrowers and mortgaging our future.

The global financial crisis gives Australia an opportunity to change the way we spend public monies at the same time as delivering the Australian government the political capital to change the system to achieve their election promises of fiscal responsibility and reduction in greenhouse gas emissions. My advice to the Federal Government is to decide to do something about climate change and to issue $30 billion in Energy Rewards to the population each year for the next 10 years. The result will be zero emissions, no government debt, a booming economy based on low cost clean energy, with zero inflation and a stable money market.