Year: 2016

The suggestion that defense contractors post performance bonds is intriguing, but, much like the rest of the military industrial complex, the question is that the people who would enforce the terms of this bond would not allow themselves to be swayed by the political and economic powers of the defense contractors:

In Washington, D.C., “military reform” usually means “acquisition reform.” There is a lot of talk about it on Capitol Hill and in the Pentagon. Enough think-tank papers have been written on the subject to clear whole forests. But of the myriad options out there, one has escaped notice.

Performance bonds — money put up by a contractor as insurance to the buyer to make sure the job is done on time and to specifications — are already required for federal building projects under the Miller Act. Prime construction contractors have to furnish a surety to the government to ensure their work is completed properly and to guarantee all subcontractors get paid should the firm go out of business.

These bonds have been used with some success in overseas defense procurement contracts. Using performance bonds is one way the government protects its interests without having to resort to judicial proceedings. In fact, the Congressional Research Service recently noted that performance bond money can be used to “offset the costs of contract completion, which can include delays and finding a new contractor.”

The same idea could potentially be applied to a weapons acquisition project to protect the government’s — and the taxpayer’s — interests. But it has so far been overlooked during the sometimes desperate search for solutions to the Pentagon’s dysfunctional buying process.

One key selling point for this idea is that provisions for using performance bonds for Defense Department acquisition already exist. As is usually the case, improving discipline in weapons spending doesn’t require new rules but using the rules that already exist to better effect.

That last paragraph reveals the weakness of the concept.

The tools are already there, but the Pentagon is unwilling to use them.

If you were to decertify the 4 services, and move procurement to an agency independent of the Pentagon, a structure similar to Sweden’s FMV, you might have a chance of making it work, but this would require a catastrophe to generate sufficient impetus to do this.

25 August 2016, 6:58 PM

The Origins of Money

1 Comment

I’m sure that you all “know” how money started.

Societies were bartering, and it became too unwieldy, and so money was created as a proxy for value that reduced the friction in the transactions.

It’s an elegant theory. The only problem is that no one has ever found an example of this ever.

No examples in archeology, none in mythology, none.

Also, how does one develop a sufficient velocity to commerce to justify the creation of money?

You need money to create the levels of commerce that justify its creation.

It’s a chicken egg thing.

An alternate theory, and one that has some actual evidence behind it, is that money grew out of a system of debts and fines that were driven by the expansion of government.

This origin story actually works the way that human minds do:

Most of us have an idea of how money came to be. It goes something like this: People wanted to exchange goods for other goods, but it was difficult to coordinate. So they started exchanging goods for money, and money for goods. This tells us that money is a medium of exchange. It’s a nice and simple story. The problem is that it may not be true. We may be understanding money entirely wrong.

The above story assumes that first there was a market, and then people introduced money to make the market work better. But some people find this hard to believe. Those who subscribe to the Chartalist school [the belief that money originated with the states attempt to influence their own economy] of thought give a different history. Before money was used in markets, they say, it was used in primitive criminal justice systems. Money started as—and still is—is a record of debt. It is a way to keep track of what one person owes another. There’s anthropological evidence to back up this view. Work by Innes, and Wray suggest that the origins of money are more like this:

In a pre-market, feudal society, there was usually a system to maintain justice in the community. If someone committed a crime, the authority, let’s call him the king, would decide that the criminal owed a fine to the victim. The fine could be a cow, a sheep, three chickens, depending on the crime. Until that cow was brought forward, the criminal was indebted to the victim. The king would record the criminal’s outstanding debt.

This system changed over time. Rather than paying fines to the victim, criminals were ordered to pay fines to the king. This way, resources were being moved to the king, who could coordinate their use for the benefit of the community as a whole. This was useful for the King, and for the development of the society. But the amount of resources coming from a criminal here and there was not impressive. The system had to be expanded to draw more resources to the kingdom.

To expand the system, the king created debt-records of his own. You can think of them as pieces of papers that say King-Owes-You. Next, he went to his citizens and demanded they give him the resources he wanted. If a citizen gave their cow to the king, the king would give the citizen some of his King-Owes-You papers. Now, a cow seems more useful than a piece of paper, so it seems silly that a citizen would agree to this. But the king had thought of a solution. To make sure everyone would want his King-Owes-You papers, he created a use for them.

He proclaimed that every so often, all citizens had to come forward to the kingdom. Each citizen would be in big trouble, unless they could provide little pieces of paper that showed the king still owed them. In that case, the king would let the citizen go, and not owe them any longer. The citizen would be free to go off and acquire more King-Owes-You papers, to make sure he would be safe the next time, too. This way, all the citizens needed King-Owes-You papers to stay out of trouble. That made King-Owes-You papers widely accepted, and consequently, also a useful medium of exchange. This lead to the rise of markets.

Not only does this better match the way humanity works, the creation of money is the other is a Kumbaya moment that really hasn’t ever occurred in the history of finance.

The author goes on to explain how we actually have relatively recent history to explain this: The Spanish conquest of the Americas, where the locals saw the need for money only when their oppressors started demanding taxes.