Declassified Pentagon UFO footage

The ufo mysteries

In April 2020 the Pentagon released three declassified videos showing pilots running into unidentified flying objects. This vindicated people who believe that extraterrestrials visit us from time to time. This is credible evidence. Now think of crop circles. Not all of them may have been the work of pranksters trying to poke fun of the UFO crowd.

A few months later Netflix tried to resuscitate the once popular documentary series Unsolved Mysteries that was already dead for a decade. Most of the episodes aren’t mysterious to the point that the so-called mysteries can’t be credibly dubbed unsolved. But one particular episode is keeping people awake at night. It is about the Berkshire UFO sightings that allegedly took place on 1 September 1969.

Four unrelated families are said to have been picked up by a UFO and moved by a ray of light on that fateful date. Apart from a few personal experiences there hardly is any recorded evidence that this really happened. Not even the local newspaper did report about it. It is compensated by the documentary. It drags on, telling a ten-minute story in forty five minutes. But at least this is a mystery worthy of being labelled unsolved.

What may strike you about the accounts of the people involved was that they are credible. Thomas Reed, who was nine at the time, claimed he and his family missed more than two hours of their lives while driving in their car. Reed says his family saw an amber glow on both sides of the road. Then everything got really calm. It was like being in the middle of a hurricane. After that they found themselves back inside the car, but his mother and grandmother had switched spots.1

Reed also said that he saw the then 14-year-old Melanie Kirchdorfer aboard the UFO. She backs up his story. Tommy Warner, who was a child back then, claimed he was also abducted that same evening. His babysitter, Debbie, corroborates his account, saying that she saw him vanish into a bright ray of light. The people involved weren’t eager to tell their stories as they would made them a laughing stock. This Unsolved Mysteries episode has left many viewers feeling on edge.2 There are more alien abduction accounts, not all of them as convincing as this one.

The question remains whether or not this is proof of aliens from advanced civilisations visiting us. It may seem the most plausible explanation, but it is not. There is a wider array of unsolved mysteries, like evidence of reincarnation, mysterious coincidences, and premonitions. These things can’t be explained by aliens visiting us. But it may be possible to explain all these phenomena. This universe is itself could be created by an advanced civilisation. And it may not be alien. It may be humanoid. We may only exist for entertainment. At first sight that may seem disturbing but it also gives us purpose. And that may just be what many people are looking for.

Featured image: Declassified Pentagon UFO footage

1. 1969 Berkshire UFO Event Gains Recognition. Jim Levulis (2015). WAMC. [link]
2. Berkshire UFO sightings: Unsolved Mysteries episode is spooking viewers – but what happened next? Jacob Stol (2020). The Guardian. [link]

Free money for everyone

Everyone should be rich

“No whining, everyone should be rich, vote Opposition Party, together for ourselves.” The Opposition Party was a fictional political party in the Netherlands run by two dubious characters. The creators of the fiction, Van Kooten and De Bie, intended to mock populist politicians. An opinion poll revealed that if the Opposition Party had been for real, it would have fetched a few seats in parliament in 1981. Why can’t everyone be rich? Maybe it is because poor people haven’t enough money.

Perhaps everyone should get some money for free. This is called a universal basic income. Nowadays most people make money by doing a job. That is because without people working nothing will be done and nothing will be made. This has been true for as long as humans exist. On the other hand, there may be more people than needed for the work that needs to be done. This has also been true for as long as humans exist.

Pointless jobs

For most of history people only worked for a few hours per day on average. This changed with the Industrial Revolution. Idleness became frowned upon as factory owners promoted the belief that everyone has a duty to work long hours. Nowadays many people do jobs that do not contribute to making products or services people need and also do not benefit society. And a pointless job can make you unhappy, or very rich.

Executing a job, whether it is useful or not, uses resources. People drive in cars to offices which are heated or air-conditioned. If a pointless job consumes materials and energy that are in short supply, or pollutes the environment, there is a compelling reason to axe it. It may be better to pay people for doing nothing instead. The anthropologist David Graeber estimates that at least a third of all jobs are pointless.1 There is no good measure as to determine which jobs are pointless.

Graeber mentions the job of a receptionist at a publisher. She had nothing to do, except for taking up an occasional telephone call. Another employee could easily have done this alongside other tasks, but without a separate receptionist no-one would have taken the publisher seriously. Graeber contends that the best indication of a job being pointless is when people who do the job themselves believe it is.1 But that is not how the economy works. If someone is willing to pay for doing it, the job has economic value.

A game of Monopoly

The super rich have increased their share of global wealth in recent decades. Whether or not it was at the expense of the rest of us is a matter of political debate. To keep the economy going and to forestall a catastrophic economic collapse, there may no be no other option than to make the rich hand out money to the rest, either via negative interest rates on their debts or a redistribution of income, for instance a universal basic income. To see why, one can think of the capitalist economy as a game of Monopoly.

If you have played the game yourself, you may have observed that at first players build capital in the form of houses and hotels. You can get rich by making the right investments. There is also an element of luck involved. The game ends when most players are bankrupt but it can be extended by letting the rest borrow money from the winners. The winners can enjoy being rich while the rest stays in the game. Of course, the losers can never repay their debts. The players could stop pretending and let the winners hand out money to the rest so that the game can continue. They might apply a negative interest rate on the debts or tax the houses, streets and hotels, to increase the pay-out for passing the start square.

monopoly1935

The alternative would be to start from square one, or more precisely, remove all the houses and the hotels, and start a new game. That might be fun for a game but in the real economy this would be a horrendous disaster. Imagine all the houses, roads, and factories gone. There would be nothing to buy and everyone would be poor. Economists figured this out long ago. The famous economist John Maynard Keynes thought that the state should borrow money from the winners and spend it so that the rest would be employed and have some money to spend so that the game could continue.2

Keynes’ plan did get a lot of attention and that’s why he is so famous. His followers are called Keynesians. Other economists weren’t so pleased. Governments could now justify lavish spending by borrowing money from the rich to spend it on public works or lower taxes, leaving a debt to be paid by future generations. Keynes also advised governments to reduce spending to pay back the government debt when the economy is doing well,2 but this rarely happened.

If there is no starting from square one, the rich are getting richer while the rest isn’t getting ahead. And the state borrowing money from the winners can make things worse as interest must be paid. In this way everyone ends up paying taxes to pay interest to the rich. This could become a huge problem in the long run but Keynes wasn’t interested in the long run. “In the long run we’re all dead,” he said. Now the long run has passed and Keynes is dead.

Monopoly has a bank that is a magical source of money. Every time you finish a round, a fixed sum is given to you. That is great for a game. If it wasn’t for this everlasting fountain of money, the game would have ended after a few rounds. Monopoly has a universal basic income and it can help to keep the economy going. But adding money to the economy can make money worth less. If people have more money, prices often go up as there is more money to buy the same stuff.

If everyone craves for that latest model mobile phone, producers can raise prices, unless people run out of money and can’t buy them. But if you give money to the rich, and call it ‘trickle down economics’ inflation may remain subdued because people can’t buy more stuff while the price of assets like real estate may rise because the rich have more money than they can spend. In a game of Monopoly the rents are fixed but if you want to buy a street from another player when there is a lot of money in the game already, you often pay far more than the initial price. The rich may end bidding up prices of streets. In the real economy the prices of assets like stocks and real estate are rising.

Realising our full potential?

Proponents of a universal basic income tell us that everything will be fine and dandy and that we will be free to realise our dreams once we get enough money for free to do as we please. So if you always wanted to become a blogger or a vlogger, you can become one with a universal basic income. That’s because you don’t have to work for a living.

The opponents paint a dismal picture of people sinking into an abyss of idleness filled with writing blogs nobody wants to read and making videos nobody wants to see. A job can make you feel useful. And there must be a compelling reason to do unattractive jobs, otherwise they won’t be done.

Many countries have benefits for people without a job. Unattractive low paying jobs are often done by immigrants who don’t have access to those benefits. If there is a universal basic income, and there is no competition from immigrants, people will only do a job if it benefits them either emotionally or financially. In other words, the job or the pay has to be attractive and unattractive jobs will only be done if they are paid well.

Income guarantee

It may be better to have an income guarantee rather than a universal basic income because that would be a cheaper scheme. Why hand out money to people that already have enough? A simple example can explain how that may work. Assume there is an income guarantee of € 500 per month and a 50% income tax.

gross incometaxnet income
€ 0+ € 500€ 500
€ 1000€ 0€ 1000
€ 2000– € 500€ 1500
€ 5000– € 2000€ 3000
simple income guarantee scheme

If your gross income is € 2000, you pay € 500 in taxes, and your net income after taxes is € 1500.There is an inventive to work as people gain financially from doing a job. In existing welfare schemes you often gain very little by taking on a job that is paid poorly. If the income guarantee is sufficient to live off, there may be no reason to have minimum wages, and you may be able to do a job cheaper than any machine if you like to do it.

The future is anyone’s guess

Machines may become better than humans at more and more jobs. Until recently machines did only simple tasks. This already put a lot of people out of work. The surplus of workers could be employed in the government and the service sector. In the future self-driving cars may replace human drivers. Robots can care for the elderly and this could be an improvement as robots don’t have moods. Computers will be better at diagnosing diseases and robots will be better at operating patients.

Few professions appear safe from the coming onslaught. Economists tell us that robots can create an ample supply of new jobs for humans, for example programming and maintaining them, but that may be wishful thinking. There is however one big problem blocking this type of progress, or our descend into the abyss of idleness. If people lose their jobs they also lose their income and don’t have money to buy the products and services these machines produce.

If machines do all the jobs then everyone may need an income guarantee. But where does the money come from? The game of Monopoly provides us with a clue. It may come from capital via negative interest rates. The market mechanism may take care of this, at least to some extent. If fewer people are needed in the workforce, there may be less demand for goods and services so interest rates may go down even further into negative territory, and there may be money for an income guarantee.

We may need an income guarantee for another reason too. If we intend to live within the limits of the planet, we may have to axe the pointless jobs that contribute little to our well-being but consume scarce resources and pay people for being idle instead. On the other hand, this may cause a shortage of energy and human labour may replace machines. In that case there may be plenty of work for humans. The income guarantee scheme must only take excess labour from the market.

The labour market

By taking excess labour off the market, an income guarantee can improve the bargaining position of workers even when it isn’t sufficient to live off. For instance, if the income guarantee is € 500, and a living wage is € 1000, a person doing a cleaning job might work fewer hours so the pay may have to rise to attract more workers. But as long as there is poverty in other areas this scheme can backfire as immigrants may take the jobs so that the improvement in bargaining power won’t materialise. Ending poverty requires good government and good education to attract investments in developing nations.

Denmark has an income guarantee combined with a duty to look for a job if you are unemployed. The Danish labour market is flexible. It is easy for companies to adapt their workforce to market requirements. The lack of job security is offset by employment security, education schemes and generous unemployment benefits.3 Not surprisingly taxes in Denmark are high but so are incomes. A job can make you feel useful so it may be better that everyone remains employed and works fewer hours.

It may be better to start providing an income guarantee in the poorest areas of the world instead. The poorest can benefit from a small amount of money like one euro per day. Putting more money in their hands can improve the economy of developing nations. If 500 million people were to receive this allowance, it would cost less than € 200 billion euro per year, a pittance compared to what is currently spent on weapons and wars. It might reduce migration and improve the bargaining position of workers elsewhere.

The future may need an economy that can endure idleness. We are currently caught up in a rat-race of producing and consuming more that is killing us in the long run. And if the economy had been able to deal better with idleness, the corona virus might not have killed so many people. It is therefore good to define a path towards that direction that will not cause problems if work needs to be done. In the long run an income guarantee might lead to the following situation:

  • unattractive jobs machines can do will be done by machines;
  • unattractive jobs machines can’t do will be paid well;
  • attractive jobs machines can do will be paid poorly as there will be volunteers;
  • attractive jobs machines can’t do will be done by humans, but it is hard to predict how these jobs will be paid.

Featured image: De Tegenpartij poster. Van Kooten and De Bie (1981). [copyright info]

Other image: Monopoly game.

1. Bullshit Jobs. David Graeber (2018). Simon & Schuster.
2. General Theory of Employment, Money and Interest. John Maynard Keynes (1936). Palgrave Macmillan.
3. Danish Employment Policy. Jan Hendeliowitz. Employment Region Copenhagen & Zealand, The Danish National Labour Market Authority (2008). https://www.oecd.org/employment/leed/40575308.pdf

A tenner on the street

A tenner on the street

There is no such thing as a free lunch

This is just another joke about economists. Suppose you just have found a tenner on the street. You are very excited about this windfall so you feel the urge to tell the next person you meet about your find. Now suppose that this person happens to be an economist. And you say: “I just found a tenner on the street.” What do you think the economist will reply? He or she would probably say: “That’s impossible. If there really was a tenner on the street then someone would have picked it up already.”

“There is no such thing as a free lunch,” is another saying that means more or less the same. Of course there are people who get a lunch for free but in that case someone else has to pay for it, just like someone else has paid for the tenner. According to economics it is impossible to get money for free, and if it is possible then someone will take it as soon as it is there, so there is no money for free for long. But why is this important? If a government makes a law it should not ignore this effect in markets.

Economists call it arbitrage

Assume that gold costs € 50 per gram in France and € 40 per gram in Germany. What will happen? There is money to be made by buying gold in Germany and selling it in France. Hence demand for gold in Germany will go up as will supply in France. According to the law of supply and demand, the price goes up when demand increases and the price goes down when supply increases, so the price in Germany goes up and the price in France goes down until the price is the same in both countries. Economists call this arbitrage

Smuggling is more or less the same. Cigarettes are more expensive in the United Kingdom than in the rest of Europe. There is money to be made by smuggling cigarettes into the United Kingdom and selling them there illegally. The price difference promotes the smuggling. If a government introduces legislation that affects the price of goods and services it should take into account that their measures can illicit smuggling and black markets. The difference between arbitrage and smuggling is that arbitrage is legal.

That’s also why it is so hard to end smuggling. If cocaine costs € 10 per gram in Colombia and € 70 per gram in the United States, there is a lot of money to be made in the trade. That’s why the War on Drugs is a failure and why there is so much violence in South America. It may be better to regulate lesser harmful drugs like canabis in the way it is done with alcohol and cigarettes. The use of harmful drugs could be seen as a medical issue and addicts could be helped rather than left on the streets. It was also a reason to deregulate financial markets. It would be hard to end gold smuggle if there are price differences between countries.

The essence of trade

A tenner is more likely to be found in places where others don’t look. That’s why Wall Street firms hire the brightest minds on the planet to find these places. For instance, Apple stock may be for sale for € 150 in Australia while in Germany the stock is doing € 151. And you must be faster than everyone else once there is a tenner on the street if you want to be the one who picks it up. Hence, Wall Street firms pay huge sums of money to have the fastest computers and networks.

So once a tenner falls out of your pocket, Wall Street has already picked it up long before it hits the street. They may even look inside your pocket and pick the tenner before it falls. So if you try to sell your Apple stock for € 150 and someone else is willing to pay € 151, Wall Street banks with their fast computers and networks snatch away the stock you offer for € 150 and immediately sell it to the other person for € 151.

You can call this theft but it is the essence of trade. The ancient Greeks already knew this. Their god for the traders was also the god for the thieves. Trade sometimes coincides with questionable ethics and the difference between trade and theft is sometimes obscure. But trade is useful. It performs the following functions in society:

  • Goods are produced in one place and consumed elsewhere so trade bridges distance.
  • Goods are produced first and consumed later so trade bridges time.
  • Goods are produced in certain quantities and demanded in other quantities so trade matches volume.

Trade is about information. A successful trader has better or more timely information. For instance, if you know that a product is successful before others know it, you can buy the stock of the corporation making the product before others do and make a profit by buying the stock cheap and selling it at a higher price. Financial markets are riddled with schemes like that. A way to combat theft disguised as trade is to make markets more transparent, which more or less means that everyone can have the same information at the same time, which more or less means that there will never be a tenner on the street just like the economist says.

Carry trade

Tenners can be found on other places too. If the interest rate in one country is lower than in another country, you can make a profit by borrowing money in the first country lending it in the second country. Economists call this a carry trade. You might expect that like the price of gold, interest rates would converge, but that doesn’t always happen because most countries have their own currency. For instance, interest rates in Japan have been near zero for decades while they were higher in the rest of the world, so there was a massive borrowing of Japanese yen. These yen were exchanged into other currencies and lent at higher interest rates.

It is attractive to borrow yen at 1% and lend dollars at 5% and pocket the difference. Normally this difference would not exist for long because the interest rate in yen would rise because of the demand for borrowing in yen. But the Japanese government didn’t allow this to happen. The central bank kept on lending yen at 1% because the Japanese economy was slow and there was no inflation. The Japanese government didn’t like the yen to rise because that would hurt their exports so they allowed it to happen. The carry trade has been very profitable for bankers around the world for nearly two decades. In a sense the Japanese central bank was throwing away massive amounts of money, but not on the street.

Throwing money at the banks

Government and central bank interventions in the markets like setting interest rates have undesired side-effects. Central banks are throwing money around and much of it ends up in the pockets of bankers. Somehow this appears to be necessary. That is because most money is debt created by banks. On this debt interest must be paid. So if you borrow € 100 and the interest rate is 5% you have to return € 105 after a year. But where does the extra € 5 come from? Here are the options:

  • Someone else is going to borrow € 105 so you can repay you loan.
  • You are not going to repay your loan (in full).
  • The government is going to borrow the extra € 5.
  • The central bank prints the € 5 out of thin air.

Usually these things happen at the same time. If people do not borrow enough, other people can’t repay their loans, banks go bankrupt and a lot of people lose their money, so governments step in and borrow. And if no-one is willig to lend to the government anymore, central banks create money out of thin air. Letting things crash isn’t an option. That could result in an economic depression. And an economic depression is very, very bad.

The prospect of a an economic depression scares the hell out of central bankers. And so they are throwing money at banks to fix any serious shortfall that might occur, usually before it materialises. The extra € 5 has to come from somewhere. So if no-one goes into debt to pay for the interest then the central bank feels obliged to create the € 5 out of nothing. That’s why central banks are called the lenders of last resort. They exist to save the economy from the banks and their scheme of usury and in doing so they save the banks and their scheme of usury. On the bright side, ending usury might solve these problems, perhaps once and for all.

Featured image: A tenner on the street. Free Shutterstock image from Blackday.

Doughnut economic model

A model for the economy

Doughnut

Our greatest challenge at present is dealing with the limits of the planet. The second greatest challenge is to provide for an acceptable standard of living for everyone. The third may be reducing differences in income and power. To a large extent these are economic questions. The order is important. For instance, what’s the point of achieving a higher standard of living when our planet is destroyed in the process? And it may be good to reduce differences in income and power but not if everyone ends up poorer.

New technologies can make these goals easier to attain. Information technology and the Internet made it possible for people everywhere around the globe to connect and to work together. This created jobs for millions of people in countries like India and China and it provided them with a better standard of living. Imagine nuclear fusion becoming available and energy becoming really cheap. That could halt climate change and make our lives easier. But we don’t know what kinds of technology there will be in the future.

The challenges we face are of an economic nature so a model of the economy can be helpful. Economics is about deciding for what we use the limited means we have and for whom. The distinction between economics and politics is not always clear because economic choices are often of a political nature. Even when you believe that everything should be left to markets then this is a political opinion.

The economist Kate Raworth came up with a model called doughnut economy. Her model can be used to assess the performance of an economy by the extent to which the needs of people are met without overshooting Earth’s limits.1 Assessing is not the real challenge here. Making it work is. Raworth did some suggestions but this model outlines a comprehensive global solution.

Much of economics is drawn from experience. Often from experience supposed economic laws were formulated. The supposed laws don’t always work so we need imagination too. Experience may be a good guide to predict human behaviour and it can help us to see how far we can make our imagination become reality.

We can’t continue to live like we do. New technologies alone will probably not save us. The changes we need most likely are a shock for most people, except the poorest. On the bright side there is the 20/80 rule. It states that if you set your priorities right, you can achieve 80% of what’s possible with 20% of the effort needed to achieve the 100%. So if we stop the 20% most resource consuming and polluting non-essential activities then we might achieve 80% of what we can possibly achieve. That may be enough so life may still be acceptable in the future.

This plan contains ideas that ignore political borders like combining environmentalism with supply-side economics. This is a comprehensive solution. People may take their pickings based on their political views but you can’t cherry pick and expect it to work. This plan doesn’t include specific proposals like building windmills nor does it dwell on sustainable development goals. It is an economic model only.

This model gives a general outline as to how to deal with the challenges using underlying economic mechanisms. Many issues have to be resolved along the way, for instance mitigating the consequences for those who suffer the most. In short the model is:

  • The limits of our planet should dictate economics. That is just plain survival. Everything else should be of a secondary nature.
  • Ending poverty should be the second goal in economic thinking. That is our moral obligation. All other goals come after that.
  • People organise themselves in different ways. Organisational flexibility is the feature that made humans so successful as a species.
  • Setting these limits will bring severe dislocations in the economy that have to be addressed in the short term as well in the longer term.
  • Money is power. Ignoring money and the profit motive won’t produce acceptable outcomes. Still, it may be possible to reduce the power associated with money.
  • The economy has a short-term bias. An important reason is interest. Negative interest rates can lengthen the time horizon of investment decisions.
  • Capital represents wealth. Capital can help to make the economy sustainable and to end poverty. Destroying capital usually is not a wise course of action.
  • It is probably easier to build the required capital via investment than via taxation as most people love to invest but hate to pay taxes.
  • It may be better not to tax capital but to tax conspicuous consumption of the wealthy instead and to ban harmful activities if that is feasible.

Caring for our planet should be central in economic thinking. In traditional economics the consequences for the planet are delegated to a marginal role. The approach so far has been that products and services can have hidden costs like the usage of scarce resources and pollution. The proposed solution is that bureaucrats calculate these costs and tax harmful products to the point that their price reflects their true cost.

The government is supposed to use the proceeds from these taxes to repair the damage done, which often doesn’t happen. Still these taxes increase the price of harmful products so people can afford fewer of them. That may help but it is a proverbial drop-in-the-bucket. Economic growth is exponential so measures to reduce resource consumption or pollution are overtaken by the growth of production and consumption.

It is hard to calculate the true cost of products and services. Another problem is that green solutions use scarce resources too. To build a windmill energy is needed, which often comes from non-renewable resources like fossil fuels. Subsidising these solutions can be inefficient. A better way out may be setting hard limits on resource consumption and pollution. That could allocate resources more efficiently and set higher rewards on solutions that really contribute to a sustainable future.

Ending poverty is not always an explicitly stated goal of economics but economics is about making the best use of limited resources. Economic thinking can help to reduce poverty. Capitalism can create wealth efficiently but doesn’t distribute it equally. An important obstacle is interest rates being limited to the downside. Negative interest rates can help to reduce poverty but poor people are often poor for other reasons too, for instance a lack of opportunities or their own behaviour.

Human organisation

The political economy describes how humans organise themselves. Humans are social animals that can cooperate on a large scale in a flexible way. It made humans the dominant species on the planet. There are three major forms of human organisation:

  • communities
  • markets
  • governments

Traditionally humans lived in communities and villages where people help each other. They contributed to their community and expected their community to care for them. Money hardly played a role and trade with the outside world was often barter. People were born into a community and it was difficult to leave. Communities are still important in modern societies but leaving is easier. Many communities are communities of choice that you can join and leave as you like. These are often based on shared interests, for instance a soccer club or a message board on the Internet.2

Markets can distribute goods and services efficiently. This is what is meant by the invisible hand. If people work in their own self-interest, this can benefit society because products and services are made according to the desires of individuals. The theory of supply and demand explains how that is achieved. This is done with the use of money in market transactions. In many instances markets fail to bring desirable outcomes. Markets are flexible but they do not think ahead so they do not take into account the limits of the planet.

Governments set the rules in societies and enforce them, often with the consent of the citizens. They provide public services that markets do not provide efficiently or in an acceptable manner. The organising agent is money too, in this case via taxes and government expenditures on public services. Governments can think ahead but they are less flexible. The limits of the planet aren’t flexible either so it may be a task for governments to enforce them.

Dealing with the consequences

The flexibility of the ways in which we humans organise ourselves allows us to set limits on a global scale and let governments, businesses and communities all over the world deal with them and reorganise themselves accordingly. These limits must be set from the top down like a dictate because the size of the planet can’t be changed. Being too flexible on this issue can be a greater mistake than not being flexible enough.

This requires a global authority. If adequate measures are taken, severe dislocations in the economy can be expected. For instance, if recreational air travel is to be ended, that will affect poor countries depending on tourism. The same is true for people working for businesses that use scarce resources produce non-essential goods and services. Millions of people will lose their jobs and their means of existence.

In the short run they have to be helped out with food and money. In the longer term people, communities, businesses and countries must adapt to the new reality. Multinational corporations may have to relocate jobs to areas that have little to offer to international markets. Ideally everyone has a useful role in society and feels secure but the economy requires a flexible labour market.

Money makes the world go round

Humans have social needs and varying motivations but most people are motivated by money, at least to some extent. Even when people are not motivated by money, those who are often determine what happens. That is because money represents power. Reforming the economy based on ideals and moral values will have little effect if money and financial markets are ignored. We need the goods and services money can buy.

People can be motivated by their jobs but most people work to make a living. Money plays an important role in this process. If you are not rewarded for doing your job well that can demoralise you, most notably if others receive the same reward for doing a poor job. A great experiment called the Soviet Union has proven that beyond reasonable doubt. Markets can help to eliminate businesses that are useless or inefficient.

Sadly the amount of money individuals acquire doesn’t always represent their merits for other people and society. The politically connected can enrich themselves at the expense of taxpayers. Business owners can exploit labourers and enrich themselves by moving jobs to low wage countries. And criminals can become very rich too.

Rich people can buy the respect and cooperation of others. They can make others do what they want them to do. This comes with social status. People like you when you are rich because they hope to benefit from your spending. Social status also comes from the products you can afford. Differences in power and social status can lead to social instability, most notably when many are poor and the rich didn’t deserve their wealth.

It is easier to finance a great endeavours like making the economy sustainable and ending poverty from investments than from taxation because nobody wants to pay taxes but everybody is happy to invest. People may work hard to build some capital for themselves through savings and investment but they won’t work so hard to pay taxes.

This was the secret of the success of the European empires that conquered the world. England, France, Spain and the Netherlands were much poorer and smaller than China, India or the Ottoman Empire, but they didn’t finance their conquests with taxation, but with investment capita. European conquerors took loans from banks and investors to buy ships, cannons, and to pay soldiers. Profits from the new trade routes and colonies enabled them to repay the loans and build trust so they could receive more credit next time.2

Reducing the power associated with money is possible. For instance, if there is a tax on currency, interest rates can go below zero, and owners of money can’t demand interest when there is a capital surplus and positive interest rates aren’t beneficial to the economy. Redistributing wealth via wealth taxes may reduce differences in wealth and power but it can also lead to capital destruction via higher interest rates.

Capitalists save and invest while ordinary people borrow and spend. Wealth taxes divert money from investment to consumption so interest rates may rise and the effect may be a reduction of capital rather than more tax income. And it is consumption that harms the planet. Wealth taxes can be useful but they aren’t part of the solution. It may be better to reduce the consumption of the wealthy instead as they often consume the most.

This would reduce the privileges attached to wealth as it reduces the options for the wealthy to use their riches. At the same time it allows capital to be allocated via markets so that efficiency considerations apply. Hence, more investment capital may become available and the excess may be transferred to governments, people and businesses via negative interest rates.

In other words, it may be smarter to ‘milk the capital of the rich’ by giving the rich fewer options to spend their wealth than to tax their wealth. In this way their capital may grow to the possible maximum and interest rates go lower to the benefit of everyone.

In the neo-liberal era government spending was constrained by interest payments. The public sector was neglected. The price paid was often poor health care, bad roads or an overstretched police force. Once interest rates are negative, we may enter an era of abundance, and interest payments may be added to government budgets. This is to be expected when resources are diverted away from the consumption of the rich.

I want it all, I want it all, I want it all, and I want it now.

– Queen, I want it all

Short-term bias

These words of Queen express the mindset behind an economic system that encourages people to buy as much stuff as possible. More is preferred to less and now is preferred to tomorrow. If we stop buying stuff, or even when we buy less, businesses go bankrupt, people become unemployed, debts can’t be repaid and money becomes worthless. And so there is a quest for economic growth that’s killing us.

Economics teaches that our needs and wants exceed the available goods and services and that we always want more. This is called scarcity. Economics also teaches us that we want stuff sooner rather than later. This is called time preference. And so we must be encouraged to save for the investments needed to make more stuff by promising us more stuff in the future. And so there must be interest, economics teaches us.

To be fair, economics goes beyond this simple caricature, but the short-term bias caused by the belief in scarcity, time preference and positive interest rates, is still everywhere in economic thinking, and also in our thinking because we are influenced by economics. The existence of negative interest rates signals that the basic assumptions underlying economics may not be correct. People keep on saving without the promise of more stuff in the future. And that is a good sign.

Our way of living has to change in a fundamental way. We need to recycle more, buy second hand stuff and forego frivolous consumption. In the future employment may come from addressing needs in society. For instance, former salespeople may care for the elderly. There is an abundance of capital, and if those who have enough constrain their desires, even more capital can be available to meet the challenges humanity is facing.

To make that happen we need new ideas about wealth and poverty. It may be wiser to see wealth as the amount of time we can to sustain our current standard of living. For instance, someone who owns € 50,000 in assets and needs € 10,000 per year to live off may be wealthier than someone who owns € 100,000 and needs € 50,000 per year. This also applies to humanity. The resources of the planet can be considered as our assets. On the basis of this measure we are becoming poorer by the day.

Interest rates are important here. They affect the time horizon of investment decisions. That is because of discounting. When investment decisions are made, this usually comes down to discounting the future income stream from the investment against the interest rate. Higher interest rates promote shorter time-horizons. This can be illustrated with an example from the Strohalm Foundation:

Suppose that a cheap house will last 33 years and costs € 200,000 to build. The yearly cost of the house will be € 6,060 (€ 200,000 divided by 33). A more expensive house costs € 400,000 but will last a hundred years. It will cost only € 4,000 per year. For € 2,060 per year less, you can build a house that lasts three times as long.

After applying for a mortgage the calculation changes. If the interest rate is 10%, the expensive house will not only cost € 4,000 per year in write-offs, but during the first year there will be an additional interest charge of € 40,000 (10% of € 400,000).

The long-lasting house now costs € 44,000 in the first year. The cheaper house now appears less expensive again. There is a yearly write off of € 6,060 but during the first year there is only € 20,000 in interest charges. Total costs for the first year are only € 26,060. Interest charges make the less durable house cheaper.3

In reality things are not that simple. The building materials of the cheap house might be recycled to build a new house. And technology changes. If cars had been built to last 100 years, most old cars would still be around. This could be a problem as old cars are more polluting and use more fuel. Nevertheless, the example shows that long-term investments can be more attractive when interest rates are lower.

The interest rate is not the cause but the consequence of the time horizons of individual borrowers and lenders in financial markets, which are people, businesses and governments. The economy doesn’t magically become sustainable because interest rates are low. Interest rates are low for a reason. If we don’t buy things we don’t need, interest rates go down. The time horizon of the economy lengthens because our economic time horizon lengthens.

Capital and wealth

The painful reality of what our wealth really is has such dramatic consequences for the economy that it is hard to foresee what a future sustainable society might look like. But capital will still represent wealth in the future. The traditional definition of capital is buildings, machines, technology and knowledge to make the products and services we use. This definition ignores the planet and that is not helping us to survive.

Only if we think of the planet Earth as our main capital and believe that we have to keep that capital in tact and that we have to sustain ourselves from the interest of this capital then economics can help us to survive. We must reduce our consumption to the point that the planet can regenerate itself. A true capitalist doesn’t consumes his or her capital either. He or she lives of the interest and saves whatever he or she can for the future.

Traditional capital can help with that. For instance, internet and video conferencing allow us to meet other people without travel. If most traffic is to disappear that would greatly reduce resource consumption and pollution but that may only happen if travel is restricted. Knowledge to make artificial meat from plants can reduce the need for fertilisers and pesticides. If we don’t have to feed livestock any more, lower yields in agriculture are acceptable. This can help to make agriculture in harmony with nature.

We may need more traditional capital in order to sustain ourselves within the limits of the planet even though much of our existing capital may prove to be worthless. For instance, if research is done to make artificial meat taste better then people will find it easier to switch. In that case factory farms may become redundant. We may need massive investments in renewable energy and recycling as well as pollution reduction. If we set limits on our resource consumption and pollution then the capital that can make us live within these limits can be profitable.

As capital represents wealth, lower interest rates can increase wealth. That is because investments must at least generate returns equal to the interest rate. If returns are lower then it makes no sense to invest as it would be better to put the money in a bank account. Hence, with lower interest rates more investments are profitable and more capital can exist. It may explain why wealthy countries often have the lowest interest rates.

The requirement of making at least the interest rate in the market has enormous consequences. A corporation that makes a product people like can go bankrupt when potential customers don’t have enough money and the corporation can’t make enough profit. In other words, if an investment in this corporation yields less than the interest rate in the market, it must fail. That’s why corporations don’t make products for poor people. There is no profit in that. Some economists think this is healthy and natural.

In a similar vein a coal fired power plant that returns 6% is considered efficient and useful while a windmill that makes 2% is seen as inefficient and wasteful at an interest rate of 4%. This logic can be suicidal because of climate change. Something is terribly wrong with this. But if investments don’t make the interest rate in the market, no-one would make them voluntarily. Nowadays windmills and solar energy are profitable because the technology has improved and interest rates have fallen.

In a market economy capital exists for profit. Capital can exist for other motives too. A community can make an encyclopedia or a software product freely available on the Internet. A government can build a road or operate a library or a hospital. But history has demonstrated that people are motivated by money and profit and that a market economy is an effective way to build capital. In order to live within the limits of the planet and to end poverty, markets may need more guidance from governments.

With lower interest rates it may be possible to make investments in ending poverty and making societies sustainable profitable so that people will make these investments voluntarily. Perhaps it is better to make a distinction between what should be done, for instance making the economy sustainable and ending poverty, and what can be done, which depends amongst others, on the interest rate. At an interest rate of 0% the windmill could be profitable and fossil fuels can be phased out. That’s why lower interest rates can be beneficial.

Indeed, there are other measures for usefulness than profitability. Perhaps the requirement to make a specific interest rate may not seem particularly useful to humankind but it can help to allocate capital more efficiently. Hence, for the benefit of humankind capital markets must continue to exist and interest rates may need to be as low as possible to generate the investment capital needed for making the economy sustainable and ending poverty.

Governments should guide this process by defining what is legal and what is not. The investment options for capitalists depend on the products and services that are legal. As the number of options are reduced, for instance by banning resource consuming non-essential consumption, the remaining alternatives can become more attractive, most notably when the excess of investment capital drives interest rates lower so that sustainable production processes with low returns become feasible.

If there is a market

Banning harmful products can elicit black markets, most notably when these products are addictive or save you from a lot of trouble or hard work and if you can use them without being noticed. It would be hard to stop the use of alcohol and drugs because people will use these products anyway. It may be easier to limit air travel as it will be difficult to fly a plane without being noticed.

Black markets and fraud are likely to arise if limits are set on the extraction of resources like fossil fuels and basic materials. The price of these resources could rise and it could be lucrative to extract more than is allowed. It might a good idea to look for places where effective control can be established. That may be on the demand side by banning or limiting certain activities or on the supply side by monitoring production.

Distortions in the markets for resources can produce losses or profits. Governments may need to take ownership of resources and compensate the owners. A government can then contract a miner to mine resources based on quota under specific regulations, and the miners can then be paid for extracting the resources. If markets become distorted by forward-looking planning then governments must intervene.

Perhaps different arrangements are possible. When interest rates are negative then future income discounted against the interest rate will have a higher net present value so it can make economic sense to keep resources in the ground.

Global competition drives down prices and it allows developing nations to build their economies too. Free trade can benefit humankind because it allows people and countries to specialise in what they do best so more and better products can be made at lower prices. Regulations aim to increase the quality of products by setting minimum standards. Regulations can favour large scale operations if they require large investments.

If the economy is to become sustainable the energy cost of producing items as well as the cost of transport may change and affect the scale of production. Regulations can stand in the way of scaling down and localising production but in many cases regulations, for instance regulations about food safety, exist for good reason. Investments to make production processes sustainable may be costly and may also favour economies of scale.

Confidence in money and trust in the financial system

Confidence is key in the capitalist economy because credit is based on confidence. The availability of investment capital comes from confidence in financial system and the economy. Actions that erode trust affect the available credit. Bank failures shatter confidence and stop the circulation of money. The Great Depression really took off after banks went bankrupt. The financial crisis of 2008 escalated once Lehman Brothers was allowed to go bankrupt.

To ensure that businesses can prosper credit must be available. A lack of trust in financial markets results in a destruction of capital. It is not a coincidence that economic crises are often preceded by a financial crisis. That’s why governments and central banks stand behind the financial system and support it at all cost. That’s why we seem to be hostage of the financial system. It doesn’t have to be that way.

Interest on money and debts makes the financial system unstable and prone to crisis because incomes fluctuate while interest payments are fixed. And because there is currency at an interest rate of zero, investors can flee to the safety of currency at no cost whenever there is some trouble. But interest rates are poised to go negative. This may be the opportunity to make the financial system more robust by charging a holding fee on currency and banning positive interest rates on money and debts.

Trust in the financial system and debts is reflected in the interest rate. If the interest rate is negative then investors prefer a certain loss to other investment alternatives. That might happen because of confidence in the currency as a store of value, for instance when inflation is non-existent. It is imperative that governments promote confidence in their currencies by limiting their primary deficits to the point that they are paid from the interest received on their debts.

Interest is the price paid for distrust so governments must be reliable and transparent to inspire confidence in financial markets. If a government is not honest to its creditors then the interest paid on its debts can rise. People like entitlements and do not like taxes so citizens may elect politicians who promise more entitlements or lower taxes. The interest rate on government debt can therefore also reflect the confidence of creditors in the citizens of a country.

A robust financial system that inspires confidence can meet the challenges that lie ahead as they will on the one hand require an unprecedented amount of capital in form of knowledge, new products and new ways of producing and distributing them, while on the other hand there will be severe shock and dislocations in the economy that only a robust financial system can withstand.

A holding fee on currency can ensure liquidity in financial markets so that the economy will not fall apart in times of economic stress. The situation in Wörgl demonstrated that even a deep depression can soon end with negative interest rates. The transformation to a sustainable economy requires an unprecedented amount of low yielding capital that may only be made profitable when interest rates are negative.

Investment guidance policies

For markets to do their job properly, capitalists should deploy their capital in the way they see fit within the options that are available. Additional measures may be needed to guide investments into desired directions like developing countries, recycling, and affordable housing. Wealthy individuals should realise they have a moral duty to make their capital contribute positively to society and the well-being of others. And even if the wealthy do not live up to their moral obligations, the laws and the financial system must channel their efforts in the right direction.

Financing the challenges of the future by investors may work better than financing them from taxes. Investors tend to chose the options that generate the most profits. In doing so they may be able to realise these goals more efficiently and generate more investment capital for the purpose. Favouring desired investments, for instance by excluding them from a wealth tax, can be a way to make them more attractive.

Products should cause as little harm as possible to the planet. Nature should be able to regenerate itself and undo the harm done. To make that possible, corporations should be responsible for the lifecycle of their products. Even when they work with contractors, the responsibility should remain with the corporation that markets a product.

During the neoliberal area businesses were often allowed to regulate themselves. This is didn’t work out well as businesses can gain an advantage from evading responsibilities in the form of reduced costs and higher profits. Governments have a responsibility to make and enforce the law. That may not be enough so journalists and activists have a duty to press businesses into sticking to the rules and governments into enforcing them.

Summary

This is an economic model meant to identify the economics to make the economy sustainable and to end poverty. There will probably be consequences that aren’t fair and they should be addressed where possible. Capital represents wealth. To make the economy sustainable we need a different view on wealth as it not being the amount of assets you currently have but the time your assets can support your lifestyle.

The planet should be seen as our main capital, not the buildings, machines, technology and knowledge to make the products and services we use. If we use more than nature can replenish, we use more than the interest of our main capital, and we become poorer as a consequence, even when the interest rate on traditional capital is positive.

To make the economy sustainable and to end poverty while maintaining an acceptable standard of living requires an unprecedented amount of traditional capital. The effort can better be financed from investments than taxes. Lower interest rates can make investments in making the economy sustainable and ending poverty more attractive.

Limiting our production and consumption will depress interest rates. Low interest rates require trust in the financial system and currencies. The financial system is based on debt, hence the integrity of debtors. A maximum interest rate of zero can improve the quality of debts. A holding fee on currency can ensure liquidity in financial markets.

Instead of spending on frivolous consumption everyone who can afford it should become a capitalist and invest in his or her own future. That can help to make the economy sustainable and to end poverty. Governments can support this process by legislation that bans harmful products and supports investments in areas that are beneficial.

Featured image: Doughnut economic model. Kate Raworth (2017).

1. Doughnut economics: seven ways to think like a 21st century economist. Kate Raworth (2017). Vermont: White River Junction.
2. Political economy. Wikipedia. [link]
3. Sapiens: A Brief History Of Humankind. Yuval Noah Harari (2014). Harvil Secker.

Liberal democracy

A definition

Democracies are often called liberal democracies. So what is a liberal democracy and why might it be the best way of government? There are no easy answers to these questions nor is there agreement on these matters. Liberalism emphasises the value of individuals while democracy is rule by majority. These two principles can be at odds.

Liberal democracies have elections between multiple political parties, a separation of powers into different branches of government, the rule of law in everyday life, an open society, a market economy with private property, the protection of human rights, civil rights, civil liberties and political freedoms for everyone.1

Liberals believe that individuals and social groups have conflicts of interest. The social order must deal with these conflicts and resolve them in a peaceful manner. To achieve such a feat, all parties must be reasonable and there should be a balance of powers. No party should be able to force its will upon others.2 It is an important reason why liberals stress the importance of individual rights.

Democracy means that government decisions require the consent of the majority of the citizens. In most cases the citizens elect a parliament that does the decision making for them. Sometimes citizens can vote for individual proposals in referendums. In reality many democratic countries aren’t fully democratic because not all government decisions are supported by a majority of the citizens.

Principles

Liberal democracy is based on a social contract, which is an agreement amongst the members of society to cooperate for mutual benefits. For instance, labourers may accept capitalism if they get a share of prosperity. That deal turned out to be more attractive than state ownership of the means of production.

Liberalism has two principles that can be at odds, namely non-interference with people’s lives and realising everyone’s potential. In this vein there are two branches of liberalism:

  • Economic liberalism promotes freedom of the markets as well as free trade and claims that the state should be of minimal size and not interfere with people’s lives.
  • Social liberalism claims that the state should help to realise the potential of people by promoting their freedom to make choices, which includes ending poverty.

Each liberal democracy more or less embraces these values. Liberal democracies come with a market economy and respect for the rights of individual citizens. Governments interfere with the lives of people and try to promote their happiness and to realise their potential. The conflicting nature of both principles makes liberal democracies differ with regard to freedom of markets and government interference.

In the United States liberalism has a different meaning. There it is another word for social liberalism or democratic socialism. In Europe the definition of liberalism is broader and this is also the definition used here. In the 17th century liberal ideas began to emerge in what is called the European Enlightenment. Around the year 1700 the philosopher John Locke came up with the following basic principles for a liberal state:

  • a social contract in which citizens accept the authority of the state in exchange for the protection of their rights and property and maintaining the social order;
  • consent of the governed, which means that state power is only justified when the people agree;
  • separation of church and state, which means that the state doesn’t favour a specific religion and does not require a religious justification.3

Is it the best form of government?

Liberal democracy is part of the European cultural heritage. Proponents claim that it is the best form of government. These universalist claims are sometimes contested on the ground that they are a form of western cultural imperialism. Another argument is that there is no guarantee that liberal democracy leads to better decisions. From a religious perspective people argue that our Creator may prefer a different kind of social order and government, possibly even a theocracy.

The argument in favour of the universalist claims is that liberal democracy emerged out of a historical process that took centuries in which rational arguments played a decisive role. The European Enlightenment challenged existing practices in government on the basis of reason. Ideas that emerged out of the European Enlightenment were tried out in different ways and refined further. Europeans also invested heavily in educating their citizens. This produced a culture of reason and compromise as well as a massive body of practical experience and best practises.

There is also no guarantee that other forms of government lead to better decisions. In an open society better information can be available so well-educated citizens in a culture of reason and compromise may make better decisions. There are a few democracies that live up to these expectations so it can work out that way. And we may not be able to determine what kind of order God desires. If our Creator is all-powerful then the emergence and spread of liberal democracy may not be a mere coincidence. It may be God’s plan.

One of the biggest problems facing liberal democracy is high expectations. Liberal democracy itself does not guarantee a reliable government that is both efficient and effective nor does it ensure a flourishing economy. This has led to disappointments. A failed and corrupt government can’t simply be turned into a success by allowing elections. Liberal democracy works best with a well-educated population in a culture of reason and compromise that doesn’t allow for corruption and abuse of power.

On the moral front there are a few issues too. Liberal democracy promises equal treatment for all people. In reality people aren’t treated equal nor do they have equal opportunities. There is discrimination based on ethnicity, gender or sexual preferences. And poor people have fewer opportunities than rich people. Still, the goal of equal treatment and equal opportunities can be something to strive for. It may be better to aim for such goals and fail from time than not having these goals at all.

If liberalism promotes tolerance then how to deal to intolerant people? Should their intolerance be tolerated? If people do not accept liberal values, should they be educated or should these values be imposed? And are free markets the best way of organising the economy or is government involvement advised? If the economy is served by stability, should dissent that causes instability be suppressed? An excessive or unnecessary use of force can undermine the foundation of liberal democracy as liberal democracy is based on reason and convincing people by argument. And indeed it is possible that liberal democracy can be overturned.

History

The preconditions for liberalism had already emerged in Western Europe during the Middle Ages. There was a larger degree of individualism than elsewhere. Liberalism itself emerged during the sixteenth century. At the time Europe was ravaged by devastating religious wars. After several decades of warfare Europeans grew tired of the conflict and began to tolerate religious differences. Some catholic countries accepted protestant minorities while many protestant countries accepted catholic minorities. Germany was almost equally divided. At the time Germany consisted of small states that had either protestant or catholic rulers.

This religious tolerance was at first more or less an uneasy truce. No party had been able to gain the upper hand. Religious minorities at first didn’t receive equal rights. They were only tolerated. Over time the case for religious tolerance became more widely accepted. It was based on two major arguments.

  • The argument of ignorance which states that only God knows who is on the right path and who is doomed so humans shouldn’t judge others.
  • The argument of perversity which states that cruelty is at odds with Christian values and that religious persecution strengthens the resolve of the persecuted.1

The concept of tolerance expanded into a general concern for the rights of individual citizens. In the 17th century liberal ideas were spreading. The Glorious Revolution of 1688 in England limited the power of the king. The rights of individuals were written down in the Bill of Rights. Parliament became the most powerful political institution based on the principle of consent of the governed. The 1776 Declaration of Independence of the United States was based on liberal principles too. It states that all men are created equal and have certain unalienable rights like life, liberty, and the pursuit of happiness.2

The founding fathers of the United States were also early liberals. The United States Constitution reflects this view. The aim of the United States Constitution is, amongst others, to safeguard the rights of individuals against the state. A large group of Americans believe that individual rights should prevail against democratically elected governments. The widespread support for gun ownership in the United States comes from a distrust of the state as a protector of life, liberty and possessions.

Democracy had not been a seriously considered since classical antiquity. It was believed that democracies are inherently unstable and chaotic due to the changing whims of the people.1 The violence during the French Revolution supported these views. It began as a popular uprising incited by liberal ideas but it soon turned into chaos and bloodshed. Order was restored by a despot ruler named Napoleon Bonaparte who did much to spread liberal reforms throughout Europe by ending the feudal system, emancipating religious minorities and imposing a liberal code of law. The spread of liberal ideas proved to be lasting and democracy was to follow a century later.

The Industrial Revolution started a period of accelerated and constant change that was disastrous for many who found themselves on the losing side. The ruling class changed. Nobility was replaced by a new elite of business people. The position of craftsmen was undermined by factories. And workers in factories laboured under miserable conditions for low wages. There were three major ways of confronting these changes:

  • Conservatives tried to hold on the old order of community, religion and nobility.
  • Socialists tried to overturn the elite of business people by giving power to workers.
  • Liberals tried to manage the change, thereby implicitly supporting the order in which business people were the ruling class.

Liberalism often coincides with the interests of business people. They have possessions and some are rich. They feared that the poor might vote for handing over their possessions to the poor. Socialism became the embodiment of this fear. Liberals were at first inclined to limit the right to vote to people who pay taxes because this excluded poor people from voting. When the threat of socialism became subdued and socialists were willing to compromise, liberals came to accept democracy based on the principle of one person one vote.

In the 19th century European countries held vast colonial empires. These colonies were kept for profit. It was generally believed that the people in these colonies had to be educated before they would be able to govern themselves. The colonial era helped to modernise these countries and most Europeans at the time believed that the oppression and the economic exploitation were justified on these grounds. There were only a few dissenters, for instance the Dutch writer Multatuli.

Liberal democracy faced a few major crises like World War I, the Great Depression and World War II. World War I demonstrated that liberal democracy and free trade weren’t a guarantee for peace and stability. The Great Depression once again challenged liberal democracy as the Soviet Union remained unaffected while Nazi Germany was able to recover and achieve full employment while other countries were still struggling. And during World War II Nazi Germany overran most democratic countries in Europe.

After World War II the European colonies became independent. The Soviet Union came to dominate Eastern Europe and China became a communist country. The United States became the protector of liberal democracy but also a number of dictatorships. This era is called the Cold War and it lasted until the Soviet Union dismantled itself after allowing the peoples of Eastern Europe to make their own choices. Major challengers of liberal democracy nowadays are the one-party system in China and political Islam.

The citizens of Hong Kong and Taiwan don’t like to loose their freedoms. Chinese too probably prefer freedom if they have a choice. And the Islamic State has shown Muslims all around the globe that political Islam can easily turn into a reign of terror. The foundations of liberal democracy may be strong, but a collapse of the global economy may turn be a more serious threat to liberal democracy than the alternatives. Reason can easily disappear once people become fearful of the future.

Reasons for success and limitations

The success of liberal democracy is therefore not a historical necessity. Liberal democracy might never have been invented or dictatorships could have gained the upper hand. That didn’t happen. Communist and fascist dictatorships came and went. Perhaps liberal democracy is a temporary phenomenon but we can’t know that now. Only the future can tell. There are a number of causes that might explain the strength of liberal democracy.

  • Liberal democracy is based on the consent of the governed so it is has the consent of the governed by default while other forms of government do not.
  • Science greatly contributes to the success of states and science is best served with an open debate that liberal democracy provides.
  • The economy greatly contributes to the success of states and the economy is best served with individual rights that liberal democracy provides.

A despot ruler or a ruling party in a one-party system might have the consent of its subjects, but if not, only force remains for the ruler or the party to maintain power. Liberal democracies usually resolve such issues peacefully through elections, making liberal democracy more stable by default. Intellectual freedom is helpful to science while economic freedom is helpful for the economy, so liberal democracy can be a potent force. Only when leadership is required, liberal democracy might not always be adequate.

Liberalism has no higher moral value than the individual, which is peculiar because the individual human is an insignificant part of this universe. And individualism may be at odds with human nature as humans are social animals. Humans are not atomic beings that choose to cooperate for mutual benefit like liberalism supposes. Cooperation is part of human nature and not a choice individuals deliberately make.

It is the success in cooperation that makes a society win out. Liberalism gives a framework for living together in peace as long as all major parties are reasonable and willing to compromise. This makes larger scale cooperation possible and that can make a society successful. For instance, the United States integrated people from different cultural backgrounds, which contributed to the success of the United States as a nation.

It is said that history is written by the victors. Strength may be the reason why liberal democracy prevailed. Liberal philosophers have tried to provide a moral justification for liberal democracy or they may have opposed it or they may have tried to improve it. Liberal democracy emerged out of thought and action, experiment and failure, and it was a process that took centuries. Philosophers like Locke contributed to its success as they set out the goals people could strife for.

Apart from individualism, liberal societies lack a higher purpose. From a scientific viewpoint there is no higher purpose to this universe. The moral codes humans live by are not more than an agreement. Only when this universe is created for a purpose there is a reason for our existence. But moral individualism can be dangerous. The challenges humanity is currently facing, most notably living within the limits of this planet, most likely requires making individuals subject to a higher causes like the survival of humanity and caring for the planet.

1. Liberal democracy. Wikipedia.
2. Liberalism: The Life of an Idea. Edmund Fawcett (2015). Princeton University Press.
3. History of liberalism. Wikipedia.