Slums in Jakarta

From scarcity to abundance

The road to wealth

Until very recently nearly everyone lived in abject poverty. Most people had barely enough to survive. In 1651 Thomas Hobbes depicted the life of man as poor, nasty, brutish, and short. Yet a few centuries later a miracle had happened. Many people are still poor nowadays but more people suffer from obesity than from hunger while the life expectancy in the poorest countries exceeds that of the Netherlands in 1750, the richest country in the world in the wake of the Industrial Revolution.

In 1516 Thomas More wrote his famous novel about a fictional island named Utopia. Life in Utopia was nearly as good as in the Garden of Eden. The Utopians worked six hours per day and took whatever they needed. His book inspired writers and dreamers to think of a better world while leaving the hard work to entrepreneurs, labourers and engineers. Today many of us have more than they need but still we work hard and feel insecure about the future.

Why is that? The answer lies within the nature of capitalism. It is not enough that we just work to buy the things we need. We must work harder to buy more, otherwise businesses go bankrupt, investors lose money, and people will be unemployed and left without income. In other words, the economy must grow. That worked well during the last few centuries, and it brought us many good things, but it is about to kill us now.

People in traditional cultures didn’t need much so they were easily satisfied. Modern people in capitalist societies believe they never have enough. You can always go for a bigger house, a more expensive car, or more luxury items. Many of us do not need more. It is the advertisement industry that makes us believe that we do. We believe there is scarcity even when there is abundance. Therefore the economy must grow. That is what they tell us.

So what are the consequences of this belief? For instance, if you eat too much this is great for business profits. And if you become obese as a consequence and need drugs for that reason, you again contribute to business profits so this is even better. Meanwhile we are using the resources of this planet in a much faster pace than nature can replenish. Humanity is standing before the abyss. Civilisation as it is will not continue for much longer. The end is near.

What has this to do with interest? If we want more products and services, we need more businesses, so we need investments. To do investments, we need savings. And to make people save, we need interest to make saving attractive. Consequently investments need to be profitable to pay for the interest. But there can be too much of a good thing. If we don’t need more stuff, we don’t need more savings, and interest rates go down.

A sustainable and humane economy?

Is it possible for humanity to live in harmony with itself and nature? We work harder than ever before and in doing so we destroy life on this planet. It is hard to change that. If you organise production differently then your products might not be sold at a price that covers the cost to make them. In a market economy the value of a product is the price it fetches in the market. Marketing often comes down to inflating the market price of a product or a service to make more profits.

In the past there have been two fundamentally different approaches to the economy. For instance, before Germany became united in 1990, there were a capitalist and a socialist Germany. Socialist Germany ensured that everyone was employed. People in socialist Germany had enough but they had little choice as to what products they could buy. For instance, in socialist Germany there were two kinds of yoghurt while there were sixty in capitalist Germany.

And there was little freedom in socialist Germany. The secret police were everywhere. When Germany became united the socialist economy collapsed. Socialist corporations suddenly were bankrupt because no-one wanted to buy the products they produced. The ensuing reorganisation of the economy led to mass lay-offs and a staggering rise in unemployment. Ultimately 60% of the jobs in the former socialist firms disappeared.

Lives and entire communities were destroyed. People suddenly felt insecure about their future as businesses had to compete and make a profit in order to survive. In a market economy efficiency considerations determine what is produced. These efficiency considerations are the result of customer preferences as well as the requirement to make a profit. Loss-making businesses usually can’t attract capital in a market economy.

The quest for efficiency means that fewer and fewer people are needed to produce the things we need. To keep everyone employed in a capitalist economy unnecessary products and services must be produced when all needs are fulfilled, causing a rapid depletion of scarce resources as well as waste. At least in theory we work can a few hours per day and resources can be freed up to address poverty and other social problems.

And what has this to do with interest? The profit a corporation is expected to make should be higher than the interest rate in the markets for money and capital. Because what’s the point in making the effort and taking the risk of running a business if you can get the same return on a savings account? And so it appears that with negative interest rates corporations with zero profits can survive and that the economy doesn’t need to grow.

Share of Labour Compensation in GDP at Current National Prices for United States

The road to inequality

Not so long ago an economist wrote a book that sent a shock-wave through the economic world because of naming primary cause of wealth inequality. The return on capital usually is higher than the rate of economic growth. Because capitalists reinvest most of their profits, capital grows faster than the economy most of the time. It can be proven beyond any doubt that capital can’t grow faster than the economy forever. Something will have to give at some point.

And what has this to do with interest? Interest is any return on capital. Interest income is the income of capitalists. That includes business profits and interest on bonds. The graph shows that labour income as part of the economy has diminished in recent decades in the United States. And that is because the capital share of national income has risen. In the past depressions and wars destroyed a lot of capital. Since 1945 there hasn’t been a serious depression or a world war.

The capitalist economy is like a game of monopoly. First everyone is doing great and capital is built in the form of housing and hotels. At some point some people can’t pay their bills anymore. To keep the game going, the winners can lend money to the losers. But at some point the losers can’t pay the interest any more. To keep the game going, interest rates must be lowered, so they can borrow more. But at some point some people can’t pay the interest again.

Sounds familiar? This happens in the real economy too. In a game of Monopoly we can start all over again. In the real economy that’s not an option. It would mean closing down factories in another great depression or destroying houses in another world war. So the game must continue. In Monopoly the rich can lend money at negative interest rates to the rest so that they can pay their bills. In the real economy this may be possible too.

Monopoly features a scheme that looks like a universal basic income. Every time you finish a round you get a fixed sum of money from the bank. At some point the bank may end up empty. The rich can then lend money to the bank at a negative interest rate to pay for it. It might seem a stupid thing to do because Monopoly is just a game. But the real economy is not. It may need an income guarantee for everyone financed by the rich.

An outline of the future economy

Can we have an economy that is humane and in harmony with nature? A few centuries ago no-one would have believed that we could live the way we do today and most people would have believed that it is more likely that unicorns do exist. If excess resource consuming consumption is to be curtailed, fewer options for consumers remain, for instance there may only be organic products, and the supermarket of the future might look a bit like those in socialist Germany.

That may not be so bad. People in socialist Cuba live as long as people in the United States despite the United States spending more on healthcare than any other country in the world. Cubans eat no fast food so they live a healthier life style. And Cubans suffer less from a negative self image than people who are exposed to the advertisement industry. Advertisements aim to make us unhappy with ourselves and what we have in order to make us buy more products and services. For instance, influencers on the Internet all do plastic surgery so that you think you need it too.

Like in former socialist Germany there isn’t much freedom in Cuba. If the government is to regulate the fat content in fast food or the sugar content in sodas then we lose our freedom to become obese. And there may soon be illicit markets for those producs as there are already illicit markets for crack cocaine. Alternatively, the government could even end our freedom to destroy life on this planet and kill our children. That is of course economic oppression, just like banning the sale of crack cocaine. But then again, having no alternative for a collective suicide could be an even more serious form of oppression

It is bad for economic growth. And it doesn’t stop here. You can think of measures that make air travel prohibitively expensive. Like in socialist Germany entire industries will be wiped out and perhaps you must take a train. And what will Google and Facebook be without advertisements? What use will their massive data gathering have? Because of all the excess consumption lots of resources are spent on guessing what we want and trying to make us buy even more.

So what has this to do with interest? The change will cause massive economic shock like the Great Depression. But it can be done and the economy will soon recover if interest rates can be negative. Before you say that it is more likely that unicorns do exist, the idea has already been tested during the Great Depression. The outcome is dubbed the Miracle of Wörgl for good reason. And evidence for the existence of unicorns has not yet been so forthcoming.

If interest rates are low then the creators of ideas and makers of things are rewarded more. They are the entrepreneurs and labourers rather than the owners of capital. It is in the spirit of Silvio Gesell who believed that labour and creativity should be rewarded and not the passive ownership of capital. Only when there is a shortage of capital or more demand for goods and services than there is supply, people need to be encouraged to save.

The economy is already constrained by a lack of demand rather than supply. That will be even more so when excessive consumption is to be curtailed and the rich have fewer options to spend their money on. And so it may become possible to fund an income guarantee with income taxes as well as negative interest on government debt. This can improve the bargaining position of labourers.

It is better to have an income guarantee rather than a universal basic income because that would be cheaper. There is little to gain from handing out money to people that already have enough. And the scheme should provide an incentive to work. A simple example can explain how that might work out. Assume there is an income guarantee of € 800 per month and a 50% income tax. The following table shows the consequences for different income groups.

Perhaps it doesn’t feel right that people are being paid for doing nothing. But nowadays people are paid for producing and selling things we do not really need and by doing so they endanger our future. Someone who does nothing at all can be worth much more for society than a travelling salesperson, a trader on Wall Street or a constructor who builds mansions for the rich. Of course it is better that people do something useful and useful people should be rewarded for their efforts, but doing nothing is always better than doing something stupid, and having zero value is always better than having negative value.

Another question is how this can be paid for? The Miracle of Wörgl shows us that the economy can flourish without growth when interest rates are negative so that most people will be employed. Money can still be a motivator to run a business or to go to work but less so than in the present. It doesn’t have to stop people from starting a business. Many entrepreneurs didn’t intend to become rich. They just wanted to be an entrepreneur or believed in the product they were making or selling. Still, there is no doubt whatsoever that a humane economy in harmony with nature will be very different from the economy of today.

Featured image: Slums built on swamp land near a garbage dump in East Cipinang, Jakarta Indonesia. Jonathan McIntosh (2004).

Other images: Share of Labour Compensation in GDP at Current National Prices for United States. FED. Public Domain

Knowledge theory

What is truth and what is knowledge? These are questions philosophers have been busy discussing for thousands of years. Knowledge theory is sometimes called epistemology. It is about the nature of knowledge and deals with concepts like truth, knowledge, belief, and justification (of beliefs). This branch of philosophy aims to answer questions like “What do we know?”, “What does it mean that we know something?”, “What makes beliefs justified?”, and “How do we know that we know?”.

This project comes with bold claims that go beyond the current state of knowledge so it is important to evaluate them and the evidence. This succinct treatise on knowledge theory is an historical account as thoughts are usually built upon previous thoughts. It discusses Western philosophy even though many of the ideas presented here have been invented elsewhere too. The reason is that the scientific revolution took place in the Western world and science is based on thinking but also greatly has influenced thinking so this is easiest way to tackle the most relevant topics.

Classical philosophy

The first ancient Greek philosophers speculated about the nature of reality. This is called metaphysics. Some early Greek philosophers believed that reality consisted of four basic ingredients. These are fire, water, earth and air. Later on a few Greek philosophers argued that the building blocks of reality are small particles called atoms that differ in shape and size and that the objects we see are groups of atoms stuck together. This was already close to the modern understanding of reality.

There were other issues that the ancient Greeks were thinking about. Some of them figured that the Earth could be a sphere. They guessed it by looking at the sea. The sea horizon is slightly curbed while boats disappear in the distance before their sails do. A philosopher named Xenophanes began to doubt religion. He realised that people believed that the gods are like themselves. For instance, black people believed that the gods are black while red-haired people believed them to be red-haired. He then argued that we can’t know what the gods are like. This was an early form of scepticism.

And why would you believe in the Greek gods if the Persians and the Egyptians have different gods? If your place of birth determines what you believe then your beliefs probably are false. The sophists were an early group of philosophers who had come into contact with other cultures. They claimed that absolute knowledge is impossible. Everything is subjective, they argued. This is called relativism. Socrates is known for his dialogues in which he debated the sophists.

Socrates claimed that there is absolute truth even though we may not know it. His pupil Plato claimed that ideas are at the basis of knowledge. He believed that ideas are more real than things. This is called idealism. Plato’s pupil Aristotle on the other hand believed that knowledge comes from observations. This is called empiricism. Both approaches have their problems. If you imagine that unicorns exist, you have the idea of a unicorn. The idealist reasoning could be that therefore unicorns exist. On the other hand, if you see a unicorn after eating some mushrooms, the empiricist reasoning could be that unicorns exist for that reason.

The foundations of knowledge can always be called into question. It is for that reason that scepticism emerged. In ancient times there were two main groups of sceptics. The first group argued that nothing is certain. They aimed at refuting the claims of other philosophers. The second group claimed that it often isn’t possible to prove or refute claims and that it is better to postpone judgement until the matter is sufficiently clarified.

These ideas were revived in Europe during the late Middle Ages after the texts of the classical philosophers were rediscovered in Arab libraries. European philosophers of that time like Thomas Aquinas and William of Ockham were theologians who believed that there is no difference between theology and science. Over time science and religion became separated as they both come from different sources. Science is based on observations and reason while religion was believed to be based on divine revelation.

Ockham is known for his simplicity principle called Ockham’s razor. It means that simple explanations are more likely to be true than complex ones. It is usually phrased as follows: “If there are several hypotheses that can explain a phenomenon equally, the hypothesis that comes with the fewest entities should be selected.” Introducing additional unproven assumptions reduces the likelihood of the conclusion being true. This argues for minimalism in reasoning. If you want to prove a point it is better not to introduce unnecessary assumptions.

Modern philosophy

Around the year 1500 European thinkers began to realise that Christopher Columbus had just discovered a completely new continent. Traditional knowledge had failed dramatically here. At the same time Protestants began to challenge the authority of the Roman Catholic Church. The ensuing religious wars ravaged Europe. They ended without a clear winner. And so the question arose as to how to evaluate the claims of the different branches of Christianity. After all, they can’t all be true.

brain in a vat believing itself to be a person who is walking

These developments spurred a renewed scepticism and a new search for the foundations of knowledge. As our senses can be deceptive, only rational thinking can produce knowledge, philosophers like René Descartes, Gottfried Leibniz and Baruch Spinoza argued. Their view is called rationalism, but it was a new version of idealism. In a thought experiment similar to the brain-in-a-vat scenario Descartes questioned everything the senses register. Your brain could be inside a vat filled with a life supporting liquid and it could be connected to a computer that generates the impression that you are a person who is walking. This is also the theme behind The Matrix. What is beyond doubt, according to Descartes, is that you exist even if you are just a brain-in-a-vat. And you can establish this fact by thinking. “I think, therefore I exist,” he claimed. Other philosophers like Francis Bacon, Thomas Hobbes, John Locke, and David Hume, believed that knowledge comes from observations. This was a renewed empiricism.

At the time there were great advances in the natural sciences driven by thinking but these advances themselves also spurred thinking. The combination of observation and thinking created scientific progress. This worked more or less as follows. Assume you plan to investigate the effect of gravity on the motion of objects. You can do this by dropping an iron ball from a tower from different heights and measure how long it takes for the ball to hit the ground. The table below shows the measurements.

Height (in metres)Time (in seconds)
0.050.10
0.500.32
1.000.45
5.001.01
10.01.43
50.03.19

It takes some thinking to figure out that the relationship between height and fall time is reflected in the following mathematical formula: fall time = 9.81 * √ (2 * height). For instance, 3.19 = 9.81 * √ (2 * 50.0). If the tower is only 50 metres high then it isn’t possible to measure how long it will take for the ball to fall from 100 metres. But if you know the mathematical formula of the relationship then you can calculate the fall time without measuring it, so: 9.81 * √ (2 * 100) = 4.52 seconds. It is observation and thinking combined that made this possible.

Finding the mathematical formula that matches the data is a bit like fitting the pieces of a jig saw puzzle. This type of reasoning is called induction, which usually is formulating a general rule based upon observations. You can never be sure that the outcome is correct. For instance, on the basis of your own observations with the help of induction you might conclude that all swans are white. On the other hand, deduction is logical reasoning from assumptions to conclusions. If all assumptions are true, and the rules of logic are followed correctly, then the conclusion must be true. Deduction usually is about applying general rules to specific situations. An example is: all men are mortal (first premise) and Socrates is a man (second premise) then Socrates is mortal (conclusion). Also, if the relationship between height and fall time is reflected in the mathematical formula: fall time = 9.81 * √ (2 * height) (first premise), and the height is 100 metres (second premise) then the fall time is 4.52 seconds (conclusion).

Immanuel Kant realised that knowledge arises from observation (empiricism) but that it is impossible to have knowledge without thinking (idealism). Observations have to be interpreted. Thinking imposes a structure upon observations. For example, we do not perceive trees or gravity. These are categories of human thought that we attach to the world. We do not know and cannot know what reality is like (relativism). The things themselves remain unknown so metaphysical speculation about the nature of reality is pointless, for instance asking yourself whether or not gravity is real or imagined. This was one of the greatest advances in knowledge theory in 2,000 years. It is a synthesis of previous thoughts that can be seen as a higher level of insight. Such major leaps in philosophy are extremely rare.

Subsequent idealist philosophers argued that absolute knowledge is possible because the mind creates reality. They argued that reality is subject to the mind so reality can be uncovered with reason. For instance, the fall of a ball is subject to mathematical laws invented by the human mind. Georg Wilhelm Friedrich Hegel believed that history is a dialectic process resulting in progress. In science and philosophy a reasoned debate of ideas in the form of argument and counter argument could lead to a higher insight called synthesis. It doesn’t seem an accident that Hegel came up with this just after Kant had upset knowledge theory by coming up with such a synthesis.

Contemporary philosophy

Kant more or less had ended metaphysics or the speculation about the nature of reality. Philosophers became less ambitious. One reaction was pragmatism. Evolution theory suggests that we hold the beliefs that help us to survive and reproduce. American thinkers such as Charles Sanders Peirce and William James viewed thinking as a means of solving problems. They weren’t interested in truth or the nature of reality. Another approach, hermeneutics, with thinkers like Wilhelm Dilthey and Martin Heidegger concerns itself with interpreting human communication. Dilthey argued that natural sciences are about interpreting observations while humanities are about understanding meaning expressed in communication. Heidegger goes a bit further by claiming that the essence of human existence is understanding.

There was also a renewed search for the foundations of knowledge. Analytical philosophers like Bertrand Russell and Ludwig Wittgenstein believed that the main tools of philosophers are language and logic. Their aim was to develop a new method to gather certain knowledge of reality. They assumed that there is an outside world and claimed that language can be used to express facts that correspond to elements of reality. This is called realism. It is related to empiricism. They claimed that there are justified true beliefs. So if Jane believes something to be true, and it is indeed true, her belief is justified. The main problem here is that this doesn’t clarify which facts are true and justified.

Karl Popper then came up the concept of falsification, which was a significant advance in knowledge theory. He believed that ideas can never be proven but that they can be falsified if there is contradicting information. For instance, you may believe that all swans are white until you spot a black swan. From then on, you may believe most swans are white and some are black. This is how knowledge progresses. The belief that most swans are white and some are black is closer to the truth than that all swans are white, even though it may still not be true if there is a red swan somewhere out there no-one has ever seen.

This is also how science progresses. Scientific theories must be falsifiable, meaning that they can be used to do predictions that you can check. For instance, the mathematical formula reflecting relationship between height and fall time can be used to predict the fall time from 100 metres. And if you do an experiment and the outcome is different than the formula indicates, the theory is falsified, unless your measurement is inaccurate, which is probably the case.

Edmund Gettier attacked the notion of justified true beliefs. For instance, if Jane looks at her watch and it says that it is two o’clock she may believe that it is two o’clock. What she doesn’t know is that her watch stopped exactly twelve hours earlier. Her belief is therefore not justified. But because the watch stopped twelve hours ago it accidentally gives the correct time so that her belief is nevertheless true.

As our knowledge increased over time our understanding of reality also changed. These changes are often driven by scientific discoveries. This also applies to science itself. Thomas Kuhn noted that the history of science is characterised by a succession of paradigms. Only 500 years ago most people in Europe believed the Earth is flat, a few thousand years old, and at the centre of the universe. The ancient Greek discovery that the Earth is a sphere was known to educated people. When Columbus set sail to the West, he expected to end up in the Indies (Indonesia). Now most people in Europe believe the Earth is a sphere, billions of years old, and an insignificant spot in the universe.

Post-modernism claims that great stories like religions and ideologies are dead and that there is no absolute knowledge. Words like reality and truth are even seen as totalitarian concepts by post-modernists. There is still room for small stories and fragments of reality but they depend on perspective. A great source of inspiration for postmodernism is Friedrich Nietzsche who proclaimed the death of God and heralded the end of the classic Christian story of God’s people on the road to Paradise that gives meaning to our existence. Postmodernism is just renewed relativism. This view was, not surprisingly, criticised by philosophers who claimed that post-modernism makes it appear that truth is subjective.

And so we are more or less back at the point where Socrates was refuting the sophists. And with the simulation argument the speculation about the nature of reality or metaphysics re-emerged. We could all be living inside a computer programme created by an advanced humanoid civilisation. And so it may seem that knowledge theory has gone nowhere. At least it is obvious that, while our knowledge increased dramatically during the last 2,000 years, knowledge theory didn’t progress accordingly.

Takeaways

There are a few takeaways from what has been discussed so far:

  • The truth or falsity of a statement may depend on whether or not it accurately describes (some part of) reality. With the help of empiricism and induction you may arrive at correct conclusions.
  • The truth or falsity of a system of statements may depend on its logical consistency. Contradictions are evidence of errors. With the help of idealism and deduction you might arrive at correct conclusions.
  • Assertions can always been called into question as the foundations of knowledge itself are questionable. Empiricism and induction as well as idealism and deduction can lead to wrong conclusions.
  • Plausibility can be used to support theories. An assertion is plausible if there is evidence supporting it and there is no evidence contradicting it. In science it often means that the theory hasn’t been falsified.
  • Pragmatism implies that usefulness is more important than truth. For instance, religions make larger scale cooperation possible. Religions allow tribes to grow larger and muster more men for war.
  • Minimalism argues for using as few assumptions as possible to prove a point and not to engage in unnecessary speculation.
  • Finally, there can be progress in thought. Two contradicting arguments can both be correct as there may be a higher level of truth that resolves the contradiction. For instance, the simulation argument can resolve the contradiction between creation and the big bang and evolution theories.

There is difference between proof and evidence. In common language these terms are used interchangeably. Proof is a final verdict that removes all doubt whereas evidence only supports a particular explanation. Proof is usually achieved by deduction while evidence is often used in induction. Proof is an idealist concept. For instance, in mathematics proof is possible as it often comes down to pure deductive reasoning that doesn’t involve an outside reality. Evidence is often related to empiricism. Applying idealist concepts to reality is problematic as general rules like the relationship between height and fall time used in deduction are usually attained through induction.

Featured image: Owl eyes. Brocken Inaglory (2006). Public domain.

Other image: Brain-in-a-vat. Alexander Wivel (2008). Public domain.

US Declaration Of Independence

What a social order needs to be

Humans imagine that people have rights and obligations or are part of social classes. There has been a wide variety of social orders throughout history.1 A social order describes the rules of a society. The ruling class usually invents the social order and benefits the most from it. A social order needs a justification to convince everyone to accept the rules. You can compare the Code of Hammurabi, a Babylonian law from 1750 BC, with the United States Declaration of Independence from 1776 AD.

The Code of Hammurabi declares that the Babylonian social order is based on universal and eternal principles of justice dictated by the gods. It divides people into three classes, nobility, ordinary people and slaves. The code then sets out all kinds of laws and punishments for transgressions. The United States Declaration of Independence begins with the following sentence:

“We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable rights, that among these are life, liberty, and the pursuit of happiness.”

On closer inspection 3,500 years didn’t make a lot of difference. The eternal principles are replaced by self-evident truths but the order still needed divine support. There is no mentioning of classes. All men are created equal. But the devil is in the detail. Women and slaves did not have these unalienable rights when the constitution was written. Only nobility was done away with as businesspeople had become the ruling class. In the 200 years that followed slavery was abolished and women received equal rights before the law.

Saying that people are equal and have equal rights is problematic. People are not equal in their abilities as well as their opportunities. For example, we can imagine the right to live but we all die. Some people die young and some live very long. Many people are poor and have no access to good education. Some people are rich and can go to the best universities. Still, we imagine that people have equal rights, just like the Babylonians imagined that people are divided into classes.

Social orders are the result of historical and political processes. Ideas are at the basis of them. Equality is a revolutionary and modern idea that has gained ground during the last centuries. It has affected political orders on every corner of the globe. Even the worst dictators now say in public that all people are equal.

A social order is a collective imagination. It doesn’t exist in reality as such, but only in the minds of groups of people. If people agree on a social order, whether it is a division into classes or the notion that everyone is created equal, it can be a stable order. Social orders bring peace and stability. If people agree on a social order they can cooperate more easily as the order settles many matters that would have to be negotiated otherwise. Therefore social orders do not only benefit the ruling class.

Featured image: United States Declaration of Indepence

1. Sapiens: A Brief History Of Humankind. Yuval Noah Harari (2014). Harvil Secker.

Origins of Political Order cover

The state of human nature

Social animals

Humans are social animals who live and cooperate in groups. Social animals like humans cooperate on the basis of kin selection and reciprocal altruism. Kin selection means that sexually reproducing animals are more likely to help one another if they share more genes. Reciprocal altruism is an exchange of favours or resources between unrelated individuals. These behaviours aren’t learned but are natural to the species. Chimpanzees are our closest relatives and in many ways behave like we do.

Chimps live in groups of a few dozen individuals. They learn to cooperate with reliable congeners and to avoid those who aren’t reliable. In a chimpanzee band a leader may emerge if he or she proves to be impartial when resolving differences. Chimps have enough memory and communication skills to guess how others will behave. They have some social rules too. Chimpanzees can cheat and betray and probably experience feelings comparable to guilt when they break them.

Chimpanzees can be violent like humans. Chimpanzee males cooperate to go outside their own territory to attack and kill males from neighbouring groups. Humans in primitive tribes and gangs sometimes do the same. Chimpanzees do not have families but they have separate female and male hierarchies. Chimpanzee politics looks a lot like human politics. The alpha female or male earns her or his status from building coalitions and gaining support. Once a female or male has become dominant, she or he has some authority to set rules and settle conflicts.

Typically human

But chimpanzees can’t achieve the high level of social organisation like humans can because they don’t use language. Language enables humans to exchange information about who is reliable and who is not with the help of gossip. A chimpanzee has to experience first-hand whether or not a congener is reliable and it can’t share this experience with others. This limits the number of others a chimp can cooperate with. Language enables humans to cooperate on a larger scale.

Language also helps humans to make abstractions and to invent theories. Words can refer to concrete objects but also to abstract classes of objects like dogs and trees and even invisible forces like gravity and gods. This allows us to produce mental models like it is warm because the sun shines. People see correlating events and imagine causal relationships. The ability to theorise helps us in the struggle to survive. For instance, if someone dies after eating from a certain plant, it can be useful to see a causal relationship between those events.

Religion

The ability to create mental models and to connect causality to invisible abstractions is also the basis for religion. Religion made people cooperate on a larger scale than would otherwise have been possible. If the size of a group increases then its ability act collectively diminishes. In large groups it is difficult to distinguish between the contributions of individual members so cheating and other forms of opportunistic behaviour are common. Religion can help to solve this issue by promising rewards in the afterlife for those who cooperate and punishments for those who don’t.

Religion is a mental model of reality where causality is attributed to forces that can’t be observed by the senses. This can lead to theories like the harvest is failing because the gods are angry so it is a good idea to sacrifice a goat to please them. In this way rituals emerge, for instance sacrificing a goat in the planting season. Rituals have another role too. They bond communities so ritualas can outlive the theory that created them and lose their meaning. Humans endow rituals with intrinsic value and they can become a goal in itself. For instance, many atheists still celebrate Christmas.

Norms and values

Humans are conformist normative creatures, which means that we invent rules and norms and tend to adhere to them. Norms differ per culture but the ability to conform to norms is part of human nature. Adhering to rules is not a rational process but it is based on emotions that control our social behaviour like anger, shame and pride. The ability to use rules greatly reduces the required negotiations needed of social interaction and permits more efficient collective action. That’s why evolution has programmed us in this way.

Rules limit our individual freedom of choice. Traffic rules, for instance, make us drive on the right side of the road. Institutions are rules too. Institutions are stable, valued, recurring patterns of behaviour. Humans can become attached to rules and institutions, for instance, a constitution or a religion. Societies are inherently conservative with regard to norms and values. This can make societies stable but it can turn into a problem once rules have outlived their usefulness and become an obstacle to change.
The struggle for recognition

One person can recognise the status of another, including the value of his or her gods, beliefs and customs. Humans organise themselves in social hierarchies so the struggle for recognition differs from the struggle for material goods. Material goods are absolute so in an economic transaction win-win is possible. Recognition is relative so recognising one person tends to be at the expense of others.

It is part of human biology. Chimpanzees compete for the status of alpha female and alpha male. Humans not only desire recognition for themselves but also for their beliefs and groups. A lot of human struggle is about recognition of groups, for example women, minorities and homosexuals. There may be an economic aspect to it like equal pay for women, but it is primarily about recognition. This is called identity politics.

Recognition can’t be enforced. Leadership comes from recognition that a specific person a person has exceptional courage, wisdom or is impartial in conflicts and a desire from a community to have a leader and submit itself to him or her. Once a society develops, recognition is often transferred to political institutions. In both cases the political order is based on legitimacy and the fact that people adhere to rules.

Social change and political development

These features are the basis of the evolution of more complex forms of organisation. The natural form of human organisation is a small group of family and friends. Our inclination to favour family and friends can be overcome by rules and incentives, for instance the requirement to hire a qualified person or the business profit that comes from doing so. Higher forms of organisation like institutions aren’t natural, and if they fail, humans revert to lower forms of organisation in small groups like gangs.

The ability to theorise enabled humans to create large societies. Most notably, ideas about ancestors, gods and other invisible forces created new rules and strong incentives to adhere to them. Our inclination to attach intrinsic value to mental models and theories promotes social stability. It also makes societies conservative with regard to ideas and rules. Rules and institutions often emerged to meet a specific challenge and become a burden once they have outlived their usefulness. Social change is often not a process of small incremental steps but of long periods of standstill alternated with sudden dramatic and often catastrophic changes.

That explains why violence has been important for political development. The fear of a violent death motivates people to do things they wouldn’t do out of mere self-interest. Stakeholders in a society tend to hold off the necessary changes so that violence or the threat of violence is sometimes required to end the stalemate. The human desire for recognition means that politics is seldom about mere self-interest. People make judgements about meaning and the value of people and political institutions.

Political institutions are the underlying rules by which societies organise themselves. These come in three basic categories: the state, the rule of law and accountability. The state is a hierarchical, centralised organisation that exercises a monopoly on legitimate force over a defined territory. The rule of law is a set of rules of behaviour reflecting a broad consensus in society that is binding to everyone, including the elites. It includes human rights., law and order, property rights, and contract enforcement. Accountability means that the government is responsive to the interests of society.

Human nature itself can’t be changed for the most part. The diversity in political developments has largely been the consequence of differences in living conditions. Groups split up and then developed their own ideas and norms. Groups also had contact with each other. This was another important incentive for change. Still, societies that were far apart, found remarkably similar solutions for their political orders. Nearly every society had been organised along kinship at first. As rules became more complex, most societies developed states based on impersonal forms of governance like centralised bureaucracies.

Feature image: cover of The Origins of Political Order

What you can read here is derived from The Origins of Political Order: From Prehuman Times to the French Revolution of Francis Fukuyama.

loan shark

Why all interest is usury

In the past when borrowers couldn’t pay their debts with interest they became the serfs of money lenders. That’s why interest was often forbidden and called usury. Most people have forgotten about that. But nowadays most money is debt on which interest must be paid. And that is the reason why there are so many problems in the financial system like instability, increasing debt levels, inflation, and central banks having so much power.

Incomes fluctuate but interest payments are fixed. And interest is a reward for risk. So the less a debtor can afford to pay interest, the higher the interest rate will be. The lender is rewarded with a higher interest rate to take that risk. It is therefore not surprising that the financial system is unstable.

Even more importantly, money is loaned into existence and must be repaid with interest. So if the interest rate is 5% and there is € 100 in existence then € 105 must be returned after a year. But where does the extra € 5 come from? There are a few options:

  • Lenders spend some of their balance so borrowers can pay the interest.
  • Some borrowers default so a part of the balance is not returned.
  • Borrowers borrow more.
  • The government borrows more.
  • The central bank creates the shortfall out of thin air.

All these things happen and often at the same time. Lenders on aggregate let their capital grow at interest. A few defaulting borrowers are acceptable but too many defaults can easily cascade into a financial crisis and create an economic crisis. The cost of letting the financial system fail is so big that this option is not acceptable. So if no-one else is willing to borrow then the government or the central bank steps in.

That’s why debts continue to grow. That’s why there is inflation. That’s why we have economic crises. That’s why governments are running deficits. That’s why there are financial crises. That’s why we need central banks to save us. That’s why all fixed positive interest rates on money and debts are usurious, even when they are low. The following example can demonstrate that.

Suppose that Jesus’ mother had put a small gold coin of 3 grammes in Jesus’ retirement account at 4% interest in the year 1 AD. Jesus never retired but he promised to return. Suppose now that the account was kept for this eventuality. How much gold would there be in the account in 2020? The answer is an amount of gold weighing 12 million times the mass of the Earth.

A mere 4% yields an incredible amount of gold after 2020 years. Someone has to pay the interest, in this case the people who borrowed money from the bank. If Jesus doesn’t come back to spend his money, that’s impossible. At some point the debtors can’t pay the interest, let alone repay their debts. They can only borrow more or default. Lowering the interest rate doens’t solve the problem. It only postpones the reckoning.

Ending usury by banning interest was never possible. Lending and borrowing would stop or go underground. The capitalist economy requires lending and borrowing so without interest it would never have been possible to build a modern capitalist economy. But interest rates are poised to go negative so it may soon become possible.

Natural Money is interest free money with a holding fee. The holding fee on money makes it attractive to lend out money at negative interest rates. For example, if the holding fee is 10%, lending out money at an interest rate of -2% will save you 8%. Once most interest rates are negative, positive interest rates can be forbidden. That can end reckless lending without producing a financial or economic crisis.

What does ending usury mean? Interest is everywhere. Interest is hidden in taxes, rents, the price of all the products and services you buy. Most pay more interest than they receive. Ending interest will benefit most people as 90% pays interest on balance while only the to 10% richest people receive interest on balance. But there is more to it. A few consequences:

  • You can’t borrow if your finances are in dire straits. Lending money to people in financial distress shouldn’t be left to the markets.
  • People and businesses will become less leveraged as there is no incentive to that. Risky ventures will be financed with equity.
  • The business for banks does’t change much. Borrowing money at -2% to lend it at 0% is as profitable as borrowing money at 2% to lend it at 4%.
  • Financial engineering will be reduced as financial engineering schemes like LBO’s often involve great leverage.
  • The economy can find support in the negative interest rate so governments don’t need to go into debt to stimulate the economy.
  • The maximum interest rate can curb debt creation for as soon as the economy recovers equity investments become more attractive relative to debt.
  • It can be a blow to political corruption because borrowers need to be trustworthy, and that includes governments, so taxes must cover government expenses.
  • This is not austerity as governments don’t pay interest on their debts but instead receive interest on their borrowings.

Ending interest reduces leverage and this can stabilise the financial system and the economye. The holding fee can ensure that the economy will flourish. Money with a holding fee has brought the economy of the Austrian town of Wörgl back to life in the midst of the Great Depression. Ancient Egypt had a financial system with this money for more than 1,000 years. Usury can end very soon and it may never come back.

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Featured image: Loan shark picture circulating on the internet, origin unknown.