Over a decade ago, the University of Missouri-Kansas City began to implement a community service requirement with an interesting, market-oriented twist. Instead of directly requiring students to work a certain number of hours in approved community service projects, UMKC imposed a system of payments and taxes designed to elicit a minimum amount of community service from the students.
Photo by: Tracy O.
Here’s how it works. Students who do community service receive a payment in the form of a university currency called a Buckaroo (the name is a mash up of “buck” and the university’s kangaroo mascot).
One hour earns one Buckaroo. At the end of each semester, each student is required to pay a 5 Buckaroo tax.
Buckaroos, however, are freely transferable. This means that some students may do no community service at all. Instead, they can purchase the Buckaroos they need from other students who have done more than the required five hours and therefore have excess Buckaroos.
The university keeps track of how many Buckaroos it issues and how many are collected. Interestingly, it always runs a “budget deficit”—meaning it issues more Buckaroos than it collects. It would be impossible for the university to run a budget surplus for any long term period without forcing some students to fail to meet the requirement.
Economists of the Modern Monetary Theory school argue that the Buckaroo program is a lesson in the way the real world economy works.
Specifically, they think it shows that “taxes drive money.” Which is to say, the value of money is created by the power of the government to impose taxes.
Here’s how MMT economist and UMKC economics professor Randal Wray describes it:
The Buckaroo is a "tax driven" currency: students demand Buckaroos to pay taxes so that they might pass their courses. The US dollar is also tax driven: the US government imposes taxes in dollars and will attach income or property to enforce the liability. It spends dollars into circulation, through its purchases and social spending; it also can lend them into circulation. The purpose of the Buckaroo tax is to move "private" resources (student labor) to the "public" sector (of community service providers)—as is the case with all tax systems.
I think this is an inadequate description of what drives the demand for Buckaroos. One hint that it is inadequate is the desire to hoard Buckaroos. Every year students earn more Buckaroos than are required to pay off the community service requirement. But why would students want to “save” Buckaroos that derive their value only from the UMKC tax?
In fact, students save Buckaroos because they believe that they’ll be able to exchange them for valuable goods and services—and dollars—with other students. The university informally keeps track of the dollar exchange rate of Buckaroos and has found that the price of a Buckaroo has increased from $10 to $15 to around $15 to $20.
What this means is that students are confident that their fellow students will continue to produce goods and services that will be valuable in the future. Some are willing to work more to earn excess Buckaroos because they desire the goods and services that the Buckaroo can be used to acquire from their fellow students. The value of the Buckaroo depends not only on the tax but on the value of what the UMKC students produce. The value of the Buckaroo rises because the productivity of the students rises.
If students believed, say, that their fellow students were going to be poorer and less productive in the future, the value of the Buckaroo would drop. At some point in the declining wealth and productivity of UMKC students, there would be no Buckaroos exchanged at all—every student would just perform the minimum required community service on their own. Assuming the community service is valuable and the excess generation of Buckaroos is therefore desirable, this would make the entire UMKC community worse off.
As the demand for Buckaroos and supply of community service declined, so would the quality of community service. The excess supply of student hours that allows community service organizations to pick and choose which students to employ, encourages students to perform better. In increases the productivity of the community service. But as the supply falls off, the quality of labor will as well. Overall output contracts massively.
At a more fundamental level, even the Buckaroo’s tax-payment value is parasitic on the productivity of the university community. If students did not believe that their teachers were producing valuable output in the classroom, the demand for Buckaroos would be zero regardless of the tax. No one would accept a Buckaroo for an hour of work unless they believed in the value of the university degree.
This has implications for real world economics, of course. It demonstrates that taxes are not sufficient to give money value—at least, not beyond the level of near-term anticipated taxes. What is required first is the creation of wealth, or genuine economic output.
The desire for the products of our economic output drives money. If productivity collapses—or if it is anticipated that productivity will collapse—the value of money will collapse right along with it.
Indeed, it’s probably safe to say that the mysterious vibrancy of unbacked, unredeemable fiat money is rooted in our faith in American economic prosperity. It’s our confidence that dollars will be able to continue to purchase valuable goods and services for as far as we can imagine into the future that leads to our willingness to accept paper money in exchange for our goods and services today.
This also explains why folks who can never be subject to US taxes—such as Chinese manufacturers—value dollars.
I believe the dependency of the value of money on productivity is one of the insights that has driven some former MMT folks, such as Cullen Roche of Pragmatic Capitalism, away from the tax-driven money assumption. As Roche put it recently, “production and not taxation sits atop the currency demand hierarchy.”
Questions? Comments? Email us atNetNet@cnbc.com
Follow John on Twitter @ twitter.com/Carney
Follow NetNet on Twitter @ twitter.com/CNBCnetnet
Facebook us @ www.facebook.com/NetNetCNBC
