Basic Income as the Core of the Economy

by George Spilkov

Outline of a framework for Basic Income at the core of an economic model based on free ma rket economy

Adam Smith predicated his vision for a free market economy on the understanding that some constraints must be set in place to ensure all members of the society are self-sufficient and also, that they exchange only the surplus produce of their labour. He even went as far as to insist on division of labour being “designed” depending on the size of the market.

“When the market is very small, no person can have any encouragement to dedicate himself entirely to one employment, for want of the power to exchange all the surplus part of the produce of his own labour, which is over and above his own consumption, for such parts of the produce of other men’s labour as he has occasion for” – Adam Smith, “The Wealth of Nations”, Ch.3

But then Karl Marx (“The Capital”) convincingly explained that the condition for self-sufficiency cannot be satisfied, because workers have lost the means of production and are no longer self-sufficient. They depend for their survival on specialized division of labour that is imposed on them.

Is that the end of Adam Smith’s free-market or could such ideas be saved by the introduction of Basic Income? I believe the answer is “Yes, Basic Income can be the solution” and for the rest of this text I’ll try to explain why and how.

What is a human being to a business? For many businesses a human being is perceived as ‘a consumer’ at the output end of the businesses and as ‘a worker’ at the input end of the businesses. Therefore, it is in the best interest of the businesses to charge the humans as much as possible when they are consumers while paying them as little as possible when they are workers. The end result of such duality is, the humans suffer, businesses make profit; wealth concentrates, the people lose completely their self-sufficiency. Even now, we are making great strides in Intelligent Automation that, thankfully, is still managing to make good use of human talent, but for how long can this go on?

The matter can get much worse for the humans. Let’s just imagine a near future world (say about 50 generations from now) where automation has advanced to levels that resemble human-like Artificial General Intelligence (AGI). In such world, workers will no longer exist in any meaningful sense, because nearly all work will be done by a super intelligent automation. The businesses will perceive most human beings only as consumers. In such future, most humans will be jobless and, majority of us will have no means of production that can make us self-sufficient.

In our current society, humans without jobs (or income) become consumers without money. Consumers without money are useless to the businesses thus can be “discarded” (it means, literally wiped out of existence). How are we going to survive then? Perhaps, some of us could survive by reverting to violent redistribution of wealth (like war for example). Such approach creates too much suffering. The correct answer is we survive together, as one species, by introducing Basic Income. It must be sufficient to ensure the existence of a wide base of consumers who, in turn, will ensure the prosperity of the businesses and the society.

Do we need to wait for a future that has a human-like AGI before we consider Basic Income? Can we introduce it today and achieve great prosperity now? I believe the answers is, “Yes, we can have Basic income today” and we can have it in a way that is independent of political or technological circumstances i.e. a way applicable to any historical period. Let’s see how it can be done.

Who decides what a ‘dignified’ living is? Perhaps, a bunch of people, called a government, makes the decision while driven by their own ideas about what is ‘basic’ and ‘dignified’? Governments change, therefore, if the amount of Basic Income is determined by some political process (e.g. government’s budget justified by some ideology) then it is likely that Basic Income will turn into another tool to exert control over the people by applying control over the amount of BI.

Much more powerful approach is to implement Basic Income by using the free market as a base for estimating BI. Let’s call it Market Driven Basic Income (MDBI). The meaning of ‘Market Driven’ is that Basic Income will be an opposing market force to the leverage businesses (and other man-made constructs) obtain over the people due to their natural tendency to treat human beings with double standards (e.g. as ‘workers’ and as ‘consumers’).

MDBI can be defined as, the ‘most common’ outgoing spending amongst human individuals when seen as consumers and taxpayers. MDBI has to be derived from metrics that ‘capture’ only transactions from a person to a business, from a person to a government and from a person to any other ‘man-made societal construct’ (i.e. those metrics should reflect only the personal outgoing spending of the human beings, not metrics like gross output or GDI, or CPI, etc.). MDBI is a figure indicated, in part, by the free consumer markets showing what most individuals purchased the most and ,in part, by any other outgoing spending the individuals have (including taxes, fees, etc.).

With MDBI in place they (the businesses, the government, etc.) may even ask payments from us for the air that we breathe, it will make no difference to any of us as long as most of us have to make such payments, because such payments will become ‘common’ therefore “highlighted” to influence the MDBI.

Think about it, the more they (various political and economic man-made constructs in the human society) charge us (the human beings), for the goods and services they try to sell us or impose on us, the more they’ll have to pay us as Basic Income. The less they charge us the less they’ll have to pay us.

Finally, to transform MDBI into Basic Income (BI) some adjustment may need to be made using the formula,

BI=MDBI+DI,

where, DI is a certain amount of Disposable Income. It drives the direction of the economy and determines its minimum speed.

The free market ideas of Libertarianism (laissez faire capitalism) imply that three components must be in place in a free market; a free transaction, a free producer and a free consumer. We must ensure the existence of free consumers before we can talk about true laissez faire free market for human consumers. BI, defined by using MDBI, ensures the existence of free-consumers. On the free market, the freedom of the consumer can truly be measured only by the amount of Disposable Income (DI) a consumer has. The consumer freedom is the disposable income a human being can afford to waste on (or invest in) whatever they like without affecting their normal life (think of DI as gambling money of sort that drive the economy).

Also, the DI adjustment to BI is necessary because the businesses will begin to create a gap between prices of products affecting the MDBI and the next-up version of the same products. Therefore, the amount of DI adjustment should be set to breach about 80% of that gap. If the gap is allowed to exist the economy will stagnate without the DI adjustment.

What is the meaning of the ‘most common’ in the definition of MDBI? I am sure statisticians may have a very good answer to that question. My guess would be, first, apply some good clustering algorithm to determine the categories of people’s outgoing spending and then find out which of these categories are common for, let say, 80% of the people.

Why would people want to work if BI is defined as previously described?

Well, the incentive to work will come from linking the Minimum Wage (MW) to the Basic Income using the following formula,

MW= K * MDBI,

Where, MW = is the minimum wage;

K = is a multiplier to represent the incentive for people to get a job. (For optimal results I recommend K=2)

That makes the total minimum income for a working person equal to =BI+MW =BI+2*MDBI or expressed otherwise = (1+K)*MDBI+DI.

The presented model will outperform in simulations any other model. It will create a vibrant and agile economy generating optimal wealth while allowing dignified existence (defined by the free market) of all members of the society and will encourage people to seek employment. It will provide sufficient income(capital) to the lower end of the wealth ladder that will stimulate attempts for new small enterprises and business ideas.

The proposed model protects the human beings from any economic or political man-made constructs (systems of rules) regardless of the historical period or the technological development.

Market driven Basic Income could be implemented within 1-2 years, because much of the data necessary to determine the MDBI is already available in some form. It is just a matter of interpreting the data for the purposes of BI and also making small adjustments to the existing laws.

In a long term, perhaps, people can declare their outgoing spending by using a ‘spending card’ of sort which logs all outgoing payments (something like ‘electronic receipts and costs logger’).

For the remaining of this text, let’s try to predict some of the expected effects of introducing MDBI and the model’s sensitivity to influences.

What will be the reaction of the government and businesses to the market driven approach to BI?

MDBI avoids government involvement in determining its amount thus making BI independent of political or moral ideologies. It will make the government feel less oppressive to the people.

It is in the government’s best interest to keep the MDBI as low as possible. That means the government will seek to apply high taxes to a small groups of people and entities (i.e the rich) instead of smaller taxes to a wider groups of people (i.e. the poor).

MDBI may incentivize the government to extend the free social services (like free educations, medical care, etc.) in the hope that it will reduce the outgoing spending of the people thus reducing MDBI while allowing the government to be in control and work for the people.

The government will have to adjust its budget policies not to some ideological dogma about what people should or should not do. Its budget policies will have to be directed towards ensuring the funds for Basic Income Guarantee defined by the market preferences of the people and the economic and technological realities of the current, or any other, historical period.

Introducing Minimum wage (MW) linked to the BI will cause the businesses to respond by providing cheap goods that will cover the common needs (so they will pay lower wages), and then there will be a version of the same goods but at a higher price. Such response does not matter to the people, because if the people choose to use their DI for the more expensive goods then those goods will eventually become ‘common’ and therefore will affect the MDBI.

Some businesses will have to restructure their capital into new types of businesses. Those businesses that cannot remain competitive will have to close. Jobs will be lost. However with the newly found spending power many people may decide to start their own businesses. Other businesses will flourish because people will be able to purchase more of their products. That will create jobs.

Many companies, for example, like McDonald’s , will flourish under the new MW and BI. They will have higher labour costs which they will transform into cost per burger. However, the new relative cost per burger will be less compared to the new purchasing power of their customers. People will purchase more burgers and the profit for McDonald’s as absolute value will not change much. Also, their client base may increase if the product they sell is desirable and competitive.

After the introduction of BI the Supply and Demand principle will continue to work but without the leverage the businesses currently have over the human beings.

Finally, let’s look at a hypothetical worst case scenario involving MDBI where businesses actively act, hypothetically, against the idea of linking BI to MW. Let say most businesses decide to close in order to protect their wealth, resources and the means of production that they own and control. That will create massive unemployment and shortage of resources. Most unemployed people may rely only on BI for their survival. If most businesses close it will cause artificially created demand resulting in empty shops and insane prices. Consumers will stop purchasing thus driving BI down. However, people need at least, food, water and shelter. They will be willing to spend their entire BI to cover those needs. If no business is willing to provide those in sufficient quintiles then the government must temporary revoke the sanctity of ownership for the very wealthy. That means, moving wealth down the wealth-ladder to those who are willing to provide products on the market to cover at least the basic human needs for sustenance and shelter. That will restart the economy.

Such hypothetical scenario is the only time when the government must interfere with the private wealth generated by the free market.

In all other cases the government does not have to do a thing (apart from figuring out ways of collecting relevant amount of taxes to cover the BI as indicated by the free market).

Since the model does not discriminate against human age and circumstances it will allow for healthy young adults to accumulate somewhat more capital (disposable income) over the early years of their lives which they may chose to invest in projects/businesses or specialized education when they become more mature and experienced.

For people with addictive habits the government will continue to provide advice, help and control (if necessary) related to the use of their BI.

Given enough time the proposed market based model for BI and MW will reduce the wealth gap and will redistribute wealth to resemble a Gaussian curve of distribution (i.e. most wealth in the hands of most people a.k.a. it will create a strong middle class). Also, it will create agile economy that fully utilizes the human potential. It will make it more difficult for businesses and governments to exert economic, political and behavioural control over the human beings thus making the society more democratic. It will create diversity thus strength in the face of adversity.

In a world where “Space is the final frontier” we should try to create economic and political constructs that rise above simplistic views about our human nature, constructs that see our species as one sentient organism capable of reaching the stars and making the Universe our playground.