People as Foundation (以民为本): The Productive Capacity Theory of Money (Part 1)
A New Framework for Understanding Economic Sustainability, Employment, and the Future of Work
Executive Summary
Conventional macroeconomic frameworks—whether neoclassical, Keynesian, or monetarist—cannot explain persistent policy failures across developed economies. This paper presents the Productive Capacity Theory of Money: money is created through debt backed by human productive capacity—working-age population, skills, health, and infrastructure. Companies aggregate and certify this capacity, enabling banks to lend against workers' future productivity. Employment isn't just wages—it's capacity activation for money creation.
This framework explains outcomes that conventional and heterodox economics cannot. Japan's stimulus fails because demographic decline shrinks the capacity base. European austerity backfires by reducing capacity faster than debt. Singapore succeeds despite no resources by maximizing capacity per capita. Innovation threatens debt-based money by reducing labor requirements while increasing productivity.
Policy implications are profound: demographics are monetary policy (immigration becomes strategic necessity), infrastructure is capacity multiplication (self-justifying investment), education is monetary base building (student debt is perverse), and automation challenges the system's foundation. The ancient Chinese principle of 以民为本 ("People as Foundation") expressed this truth millennia ago. This paper recovers it, synthesizes it with MMT and Marx, provides explicit mechanisms, and derives actionable policy for contemporary institutions.
Table of Contents (Part 1)
Section I: Introduction — The Failure of Financial Engineering
- The Policy Failure Puzzle
- What Heterodox Economics Gets Right (and Wrong)
- The Missing Mechanism
- A Simple Illustration: The Employment Letter
- People as Foundation (以民为本)
- What This Paper Will Show
Section II: The Framework — Productive Capacity as Foundation
- Understanding Money Creation
- The Three Elements of Productive Capacity
- How Companies Aggregate and Activate Capacity
- Why Population Dynamics Matter
- The Innovation Paradox
- Infrastructure as Capacity Multiplication
- Debt Sustainability Reconsidered
- The Complete System
Section I: Introduction — The Failure of Financial Engineering
The Policy Failure Puzzle
For decades, policymakers have deployed increasingly sophisticated monetary and fiscal interventions to manage economic performance. The results speak for themselves—and they are damning.
Japan has maintained zero or negative interest rates for 25 years. The Bank of Japan has purchased government bonds, corporate bonds, even equity ETFs in unprecedented quantities. Government debt has risen from 60% of GDP in 1990 to 264% today. The result: persistent deflation, stagnant wages, and an economy that cannot grow despite unlimited monetary accommodation. Conventional theory says this is impossible. Reality disagrees.
Europe imposed fiscal austerity after 2008 to restore confidence and reduce debt burdens. Greece cut government spending by 25%. Spain, Portugal, and Italy followed with their own austerity programs. Conventional theory predicted "expansionary austerity"—that cuts would boost confidence and spark private investment. Instead, Greek GDP fell 25% and its debt-to-GDP ratio rose from 130% to 180%. Austerity made debt less sustainable, not more.
The United States engineered multiple rounds of quantitative easing, maintains the world's reserve currency, and can borrow at extraordinarily low rates. Yet its infrastructure receives a D+ grade from the American Society of Civil Engineers. Student debt has reached $1.7 trillion, with college costs up over 1,200% since 1980. Despite being the world's most innovative economy, inequality has soared and broad-based prosperity remains elusive.
These are not minor policy mistakes or temporary setbacks. They represent fundamental failures of our dominant economic frameworks to explain how monetary systems actually function. Neoclassical, Keynesian, and monetarist theories cannot adequately account for why Japan's unlimited stimulus fails, why European austerity backfired, or why American innovation hasn't translated into shared prosperity.
What Heterodox Economics Gets Right (and Wrong)
Recognizing these failures, heterodox economic traditions have developed important critiques and alternative frameworks.
Modern Monetary Theory (MMT) correctly identifies that governments issuing their own currency face no purely financial constraints. They cannot "run out of money" in the way households or corporations can. The real constraints are productive resources and inflation, not fiscal ratios or bond market confidence. MMT rightly emphasizes that money creation happens through government spending and bank lending, not through collecting taxes or deposits first. This inverts conventional thinking about fiscal policy and reveals space for government action that mainstream economics denies.
Marxian economics identifies that labor is the source of value and that capital represents claims on labor's productivity, not an independently productive factor. The employment relationship involves structural extraction: workers produce value, capitalists capture surplus. Distribution is not determined by marginal productivity but by power relations embedded in property rights and institutions. Marx grasped that production requires real resources and human effort, and that financial abstractions obscure this fundamental reality.
Both traditions grasp crucial truths that mainstream economics obscures: money is not neutral, production requires real resources and human labor, power and distribution matter for system sustainability, and financial engineering cannot substitute for productive capacity.
Yet neither provides a complete framework for contemporary policy. MMT focuses on government monetary sovereignty and policy space but lacks explicit mechanisms linking money creation to productive capacity. It correctly notes that real resource constraints matter but doesn't systematically analyze what constitutes productive capacity or how it changes. Marx identified labor as the source of value but wrote in an industrial era with different technological and institutional structures, and his revolutionary prescriptions don't translate cleanly to contemporary democratic capitalism.
The Missing Mechanism
What's missing is an explicit framework connecting monetary mechanics to their productive foundations—a mechanism that:
- Explains how money creation depends on productive capacity, not just government authority or bank lending
- Specifies what productive capacity actually is: population, skills, health, infrastructure, technology
- Shows how companies function as intermediaries between individual workers and the financial system
- Demonstrates why demographic change, infrastructure investment, and education aren't just social policies but monetary fundamentals
- Provides actionable policy guidance within existing institutional structures
This is what the Productive Capacity Theory of Money delivers: a synthesis of MMT's monetary mechanics, Marx's insight that labor is foundational, and the ancient governance principle of 以民为本 (People as Foundation), combined with explicit mechanisms for contemporary policy.
A Simple Illustration: The Employment Letter
Consider a simple observation that reveals the entire mechanism. When you receive a job offer and sign an employment letter, your relationship with the financial system transforms overnight. Banks that wouldn't give you the time of day suddenly want to lend you hundreds of thousands of dollars. Credit card companies compete for your business. Mortgage lenders calculate exactly how much house you can afford—typically three to four times your new annual salary.
What changed? You're the same person with the same skills and abilities you had a week ago. Your knowledge hasn't increased. Your work ethic is identical. Your intelligence is unchanged. Yet somehow, you've become "creditworthy."
The conventional explanation focuses on income: you can now repay debts. But this misses something profound. It's not just that you have income—it's that a company has certified you as having productive capacity worth monetizing. The bank isn't lending against your paycheck. It's lending against your productive future, and the company has validated that this future exists and has quantifiable value.
You have become, in the language of finance, valuable productive capacity. The company, by hiring you, has activated that capacity and made it visible to the economic system.
This simple observation reveals the actual architecture of our monetary system:
People possess productive capacity → Companies aggregate and activate this capacity → Financial institutions lend against this activated capacity → Money comes into existence
Your employment isn't just about exchanging labor for wages. It's about entering a system where your productive capacity can be monetized—by you through your ability to borrow, and by your employer through their ability to borrow against their workforce. When a company hires a thousand employees with collective productivity worth $50 million annually, that company can now borrow hundreds of millions of dollars. The workers enable the borrowing, but the company captures most of the value this enables.
This is not a conspiracy. It's not even necessarily intentional exploitation. It's simply how the system works—a mechanism so fundamental that it's become invisible.
People as Foundation (以民为本)
There is, however, a much older framework for thinking about economics and governance that naturally aligns with what we're discovering. In Chinese political philosophy, the concept of 以民为本 (yǐ mín wéi běn)—"People as Foundation"—has guided statecraft for millennia. The principle is straightforward: the strength and sustainability of the state derive from the capacity and well-being of its people.
This wasn't abstract philosophy. Chinese dynasties understood that investment in the population—through education, infrastructure, agricultural support, and social stability—was investment in the foundation of state power. A capable, healthy, educated population was the source of prosperity and resilience. Neglect the people, and the entire structure would collapse regardless of how much gold sat in the treasury.
Modern Singapore has operationalized this principle perhaps more explicitly than any other contemporary state. Every major policy decision is evaluated through the lens of whether it builds human capacity: Does it improve education? Does it enhance infrastructure that multiplies productivity? Does it attract or develop talent? Does it maintain the health and capability of the workforce? Singapore's economic success—a city-state of 5.6 million competing with nations of hundreds of millions—demonstrates the power of this framework.
What we're proposing is that 以民为本 isn't just good governance philosophy. It's actually how money and economic systems work at a mechanical level. The Chinese ancients and the Singaporean moderns understood something that Western economics has obscured: people's productive capacity is the foundation, and everything else—money, capital, financial systems—are structures built upon that foundation.
What This Paper Will Show
This paper demonstrates that productive capacity—not gold, government decree, or financial abstractions—is the foundation of money. Section II develops the mechanism: money is created through debt backed by productive capacity; companies aggregate and certify this capacity. Section III presents six country case studies validating the framework. Section IV explains why economic complexity obscures these mechanisms. Section V derives policy implications: demographics become monetary policy, infrastructure becomes capacity multiplication, education becomes monetary base investment. Section VI positions the framework within economic theory and charts the path forward.
In ancient China, they knew this as 以民为本. In Singapore, they practice it. In the West, we've obscured it beneath financial complexity. This paper recovers that insight and provides mechanisms to operationalize it in modern economies.
Section II: The Framework — Productive Capacity as Foundation
Understanding Money Creation
To understand why People as Foundation (以民为本) isn't just philosophy but economic reality, we must first understand how money actually enters the economy. The conventional story—that central banks print money or control the money supply—is incomplete at best and misleading at worst.
In modern economies, the vast majority of money is created when commercial banks make loans. When a bank approves your mortgage, it doesn't take money from deposits and lend it to you. It creates a new deposit in your account and a corresponding loan on its books. Money has been created from nothing—or rather, from your promise to repay.
Here's a concrete example: You're a software engineer earning $120,000 annually. You apply for a $400,000 mortgage. The bank doesn't ask "Do we have $400,000 in the vault?" It asks: "Can this person generate enough income over 30 years to repay $400,000 plus interest?" Your employment letter certifies you can. The bank creates $400,000 by typing numbers into your account. Your productive capacity—your ability to write code, solve problems, generate value for 30 years—backs this newly created money.
This relationship—debt backed by productive capacity—is the foundation of our monetary system. And once you see it, everything else falls into place.
The Three Elements of Productive Capacity
Productive capacity isn't a single thing. It's a combination of three elements:
1. Labor Capacity
The most fundamental element is human beings capable of work. Labor capacity encompasses the raw hours available (determined by working-age population), skills and education (human capital), health and longevity (productive years), organizational and social capabilities, and geographic distribution and mobility. A country with 100 million working-age people has vastly more capacity to back money creation than one with 10 million, all else equal. But quality matters as much as quantity: a highly educated, healthy workforce represents higher-value capacity than an unskilled, unhealthy one.
2. Multiplication Infrastructure
Infrastructure doesn't just enable productivity—it multiplies it exponentially. This includes physical infrastructure like transportation, energy, and water systems; digital infrastructure including internet and telecommunications networks; educational infrastructure such as schools, universities, and training systems; healthcare infrastructure encompassing hospitals and public health systems; and legal and institutional infrastructure that provides property rights and contract enforcement. A skilled worker without infrastructure has limited productivity. The same worker with high-speed internet, reliable transportation, and access to advanced tools has productivity many times higher. Infrastructure is the multiplier on human capacity.
3. Innovation and Technology
Knowledge and technology amplify what human labor can accomplish. This includes scientific understanding, technical capabilities, organizational methods, and accumulated knowledge and culture. This is where the framework becomes complex, because innovation creates a paradox we'll explore shortly: it increases output per worker while potentially reducing the total labor required.
How Companies Aggregate and Activate Capacity
Individual productive capacity is difficult to monetize. Banks are reluctant to lend to a single person with skills but no employment, because coordination is required to turn capacity into realized productivity. This is where companies enter the picture.
Companies perform several critical functions:
First, they provide aggregation: pooling individual productive capacity into larger, more predictable units. One person with $50,000 in annual capacity is risky to lend against; a thousand people with $50 million in collective capacity is much more bankable.
Second, they enable activation by providing the tools, organization, and market access that turn potential capacity into actual productivity. A software engineer has skills, but needs computers, project management, customer relationships, and payment systems to generate value.
Third, and most crucially, they offer certification: validating to the financial system that this capacity is real and will be productively deployed. When you're hired, the company is telling banks, "This person's capacity is genuine, and we will ensure it's utilized."
Finally, they facilitate monetization by creating the conditions for debt to be issued against productive capacity. The employee can now borrow for housing, cars, and consumption. The company itself can borrow against its workforce. Suppliers can extend credit. Investors will provide equity capital.
The Employment Relationship Reframed
Through this lens, employment looks very different from a simple wage-labor exchange. The employee provides current labor and output (the conventional view), but also productive capacity that enables borrowing (the hidden mechanism), flexibility and option value on future productivity, and reputation and human capital that adds to company value. In exchange, the employee receives wages (typically 30-70% of value generated), benefits and training, and capacity certification that provides access to borrowing.
Meanwhile, the company captures current output minus wages (conventional profit), the ability to borrow against its workforce (corporate debt capacity), equity value based on its talent pool (market capitalization), option value on employee productivity growth, and first claim on innovations and productivity improvements.
The asymmetry is structural. The employee needs the company to activate their capacity and certify them to the financial system. The company can thus capture most of the "capacity premium"—the total value enabled by having productive capacity, beyond just the direct output.
This isn't necessarily exploitative in intent, but it is extractive in structure. The system is designed such that capacity activation requires corporate intermediation, and that intermediation captures substantial value.
The Invisible Foundation: Household Productive Systems
The framework as presented captures only visible monetized capacity. But monetized work depends entirely on unmonetized household labor—childcare, eldercare, cooking, cleaning, health management. A software engineer cannot work 40 hours per week unless someone ensures meals are prepared, children cared for, the home organized. Corporate productivity is parasitic on this domestic labor.
Why does household labor remain unmonetized? It requires no corporate intermediation, cannot be certified to the financial system (no employment letter validates household capacity), and creates no debt capacity. Despite being foundational to monetized work, it remains structurally invisible.
The implications are profound. The total productive capacity base is far larger than employment statistics suggest. Demographic decline partly reflects this structural gap: household and reproductive labor is uncompensated, making it economically irrational to have children even though population reproduction is necessary for the monetary system. Birth rates collapse because the system makes reproduction invisible and unrewarded. The "capacity premium" workers fail to capture includes not only the monetization value companies extract, but also their own household labor enabling their employment. This creates gendered extraction, as historically this fell disproportionately on women's unpaid work. This is the foundation supporting the visible foundation—absolutely necessary, entirely invisible, structurally uncompensated.
Why Population Dynamics Matter
If productive capacity backs money creation, then population dynamics aren't demographic statistics—they're monetary fundamentals.
A growing working-age population expands the base of capacity, enables sustainable debt growth, creates natural demand expansion, supports innovation through fresh cohorts, and allows the monetary system to expand naturally. A stable working-age population requires productivity growth to expand capacity; debt must grow slower or be matched by productivity gains. The system can work but has less margin for error and requires active management to maintain. A shrinking working-age population presents the most severe challenge: the capacity base contracts, existing debt becomes harder to service, deflationary pressure increases, new debt creation becomes problematic, and the system faces a fundamental challenge to debt-based money itself.
This is why Japan's situation is so dire. It's not that Japanese policy is especially bad—it's that the foundation itself is eroding. No amount of monetary stimulus can substitute for missing productive capacity.
The Innovation Paradox
Innovation should be unambiguously good: more output with less input. But in a system where money is backed by labor capacity, innovation creates profound tension.
Consider: a factory employs 1,000 workers producing $10 million annually. Innovation allows the same output with 100 workers. Higher productivity per worker, but 900 workers no longer needed. If they don't find other productive deployment, that's capacity sitting idle. The capacity base shrinks even as output per worker rises.
Three possible outcomes: (A) New activities absorb freed labor—the 900 workers find employment in services, creativity, new industries; the system remains sustainable. (B) Unemployment and idle capacity—the 900 cannot find deployment; deflationary pressure builds; social crisis follows. (C) Redistribution and reduced work—everyone works less; income distributed more broadly through UBI or profit sharing; consumption maintained despite less employment, but requires fundamental institutional redesign.
Historically, outcome A prevailed: agricultural productivity freed labor for manufacturing, manufacturing for services, services for knowledge work. But AI and automation threaten to reduce labor requirements across all sectors simultaneously. If human labor becomes increasingly unnecessary for production, what backs money creation? This is the innovation paradox: success at productivity may undermine the foundation of the monetary system itself.
Infrastructure as Capacity Multiplication
One of the framework's most important insights is that infrastructure isn't just helpful—it's a direct multiplier on productive capacity and thus on sustainable money creation.
The multiplication effect:
Consider a rural software developer in a remote village:
- Poor internet: 2 Mbps, frequent outages
- Long commute: 3 hours daily on bad roads to nearest city
- Unreliable electricity: power cuts several times per week
- Result: Can work maybe 20 hours/week effectively, limited to small local projects, productivity ~$25,000/year
Same developer relocates to a city with modern infrastructure:
- Fiber internet: 1 Gbps, reliable
- Urban transit: 20-minute commute
- Stable electricity: 24/7 power
- Digital payment systems, co-working spaces, tech community
- Result: Can work 40+ hours/week, access global clients, collaborate real-time, productivity ~$100,000/year
The infrastructure didn't change the person's skills or intelligence—it multiplied their productive capacity by 4×. This is why infrastructure investment has such high returns: it multiplies the capacity of everyone who uses it.
This has profound implications:
Infrastructure investment isn't "spending"—it's capacity base expansion. A government that borrows $1 billion to build infrastructure that multiplies labor productivity by 20% across a workforce generating $100 billion annually has increased the capacity base by $20 billion. The debt is more than justified by the expanded foundation.
Infrastructure decay is capacity base erosion. Crumbling roads, failing bridges, slow internet don't just inconvenience people—they reduce the productivity of every worker affected. The United States, with deteriorating infrastructure receiving a D+ grade from the American Society of Civil Engineers, is watching its capacity multiplier degrade.
China's infrastructure obsession makes sense. Western economists criticized China's infrastructure spending as wasteful or excessive. But China understood intuitively that infrastructure multiplies capacity. The vast majority of this infrastructure—high-speed rail connecting hundreds of cities, extensive highway networks, modern ports and airports—has proven its value in enabling productivity and economic integration. The current crisis stems not from infrastructure "overbuilding" but from allowing private debt to financialize housing into a speculative bubble rather than maintaining its productive function.
Singapore's infrastructure excellence is strategic. With only 5.6 million people, Singapore can't compete on population scale. But by maintaining world-class infrastructure—top-tier transportation, universal fiber internet, excellent healthcare, efficient institutions—it maximizes the productivity multiplier on every resident. Each Singaporean worker operates at perhaps 3-4x the productivity they would in a lower-infrastructure environment.
Debt Sustainability Reconsidered
This framework completely reframes debt sustainability. The conventional view focuses on debt-to-GDP ratios, government revenues, and bond market confidence. These matter, but they're secondary.
True debt sustainability depends on the ratio of debt to productive capacity base.
Japan can sustain 264% debt-to-GDP because of high per-capita productivity (quality capacity), excellent infrastructure (capacity multiplier), strong institutions (low friction, high efficiency), and social cohesion (low enforcement costs). However, the system is stagnant because the capacity base is shrinking. High debt is "sustainable" in that it won't default, but the economy can't grow because the foundation is eroding.
Conversely, some developing nations face crises at just 60% debt-to-GDP due to lower productivity per capita (weaker capacity base), poor infrastructure (low capacity multiplier), weak institutions (high friction), and currency mismatch (debt in dollars, capacity in local productivity). The debt level is the same relative to GDP, but the capacity base backing it is vastly different.
China's massive debt worked until recently because of a rapidly expanding working-age population (capacity base growing), massive infrastructure investment (capacity multiplier increasing), education expansion (capacity quality improving), and debt growing while capacity was growing even faster. Now, however, demographics are turning, infrastructure buildout is maturing, and debt growth has exceeded realized capacity growth (ghost cities). The foundation can't support the structure anymore.
The Complete System
Putting it all together, here's how the system functions:
Foundation Layer: Productive Capacity
Working-age population × Skills/education × Health
× Infrastructure multiplier
× Innovation/technology
= Total Productive Capacity Base
Activation Layer: Companies and Institutions
Companies aggregate individual capacity
→ Provide organization, tools, market access
→ Certify capacity to financial system
→ Enable monetization
Monetary Layer: Debt Creation
Banks lend against activated capacity
→ Money created as deposits
→ Debt must be serviced from productive output
→ Sustainable if debt ≤ capacity base
Distribution Layer: Who Captures Value
Workers: Wages + personal borrowing capacity
Companies: Profits + corporate borrowing + equity value
Financial sector: Interest + fees
Government: Taxes (can redistribute or invest in capacity)
The system works when the capacity base is expanding or stable, debt growth matches or lags capacity growth, infrastructure multiplies capacity efficiently, activation mechanisms work (low unemployment), and value distribution maintains social stability.
The system breaks when the capacity base shrinks (through demographics or infrastructure decay), debt grows faster than capacity (over-leverage), activation fails (unemployment, idle capacity), innovation reduces labor requirements faster than new activities emerge, or extraction becomes too concentrated (inequality, political instability).
Why This Framework Matters
This mechanism reframes economic policy fundamentals:
Demographics are monetary fundamentals, not social issues. Countries refusing immigration while birth rates collapse choose monetary system decline.
Infrastructure is capacity base expansion, not government spending. Cutting infrastructure to "reduce debt" reduces the foundation backing that debt.
Education directly enhances capacity base. Student debt is perverse: charging people to build the capacity backing the monetary system.
Employment is capacity activation, not just income. Unemployment is idle capacity that could back money creation.
Innovation challenges the system's foundations. We must find new activities for displaced workers or redesign monetary systems for post-labor economies.
Inequality is systemically destabilizing. When capacity activation is gatekept and returns concentrated, the broad base backing money creation is excluded from capturing value.
All of this was implicit in 以民为本—People as Foundation. Modern economics obscured this truth beneath complexity. This framework recovers it and provides mechanisms to operationalize it.
Part 2 will focus on evidence and case studies.
I'm Daniel Tan Fook Hao. I developed this framework to understand the Dao of money and how that relates to the individual.
Contact and Further Engagement
Feel free to reach out to me via danieltan@omg.lol for further collaboration on the topic.