Before the Industrial Revolution began in England, European crafts and sciences had already advanced. During the Middle Ages, inventions such as gunpowder, eyeglasses, the compass, the printing press, the mechanical clock, the windmill, and the spinning wheel had reached Europe from China or the Middle East. What made Europe culturally different was its individualism. In the 14th and 15th centuries, a new spirit emerged in Italian merchant towns like Venice, Florence, and Genoa. It was the spirit of the merchant which subsequently spread throughout Europe.
And so, Europeans gradually abandoned their traditional Christian values and developed a capitalist spirit by pursuing worldly wealth and pleasure rather than modesty and bliss in the afterlife. There were merchants elsewhere, but the populace held them in low regard because of their depraved ethics, as greed was their core value. It was the pursuit of profit that drove European explorations and colonialism. Making money became the new moral virtue, alongside inquisitiveness, creating a dynamic that would change the world.
During the 16th and 17th centuries, Europeans explored the world and invented the microscope, the steam turbine, the telescope, and the steam pump. Modern science began when Nicolaus Copernicus calculated the trajectories of the planets by assuming that they revolved around the Sun. Isaac Newton later formulated the laws of motion. Europeans expanded their colonial empires, thereby increasing the size of their markets, a prerequisite for the mass production that industrialisation was to bring.
The British were the most successful. Supported by a strong navy, they built the largest colonial empire. They also invented modern banking, creating money out of thin air or financing capital by imagining future revenues. In 1689, the British had the Glorious Revolution, which, like many revolutions, was about taxation. Businesspeople then took over the government. Taxation henceforth required the consent of the taxed, thus, property owners. And the state became a venture of the propertied classes, like the Dutch Republic, the wealthiest nation at the time, already was.
The taxpayers didn’t like to pay for ineptitude and corruption, so the quality of the British state improved, and the state used its military to support the colonial business ventures of the propertied classes. Great Britain had easily accessible coal deposits and developed a large coal mining industry. Due to a lack of firewood, coal had become England’s primary heating source. As mine pits grew deeper, they became prone to flooding. With no transport costs, a coal-fired steam engine to pump water out of the mine became cheaper than manually pumping with buckets.
Ignition
Trade with the colonies promoted British industries, resulting in high living standards and wages in England. In England, coal was easily accessible, so energy was cheap. In Great Britain, the aristocracy had an entrepreneurial spirit and paid taxes, making the British government a reliable borrower. Banking innovations, most notably the creation of money, made British capital markets more efficient. And so, Great Britain had low interest rates, so a low price for capital. The first machines were clumsy and inefficient, but high wages, cheap capital and affordable energy made them profitable.
This combination of factors is why the Industrial Revolution started in England rather than elsewhere. Wages in France were lower, while the banking system was less developed. The rent-seeking French aristocracy didn’t pay taxes, making the French government an unreliable borrower. Thus, interest rates in France were higher. Once the first machines were in operation, inventing new ones or improving existing ones became profitable, so British engineers got busy enhancing the steam engine’s efficiency and inventing contraptions like the spinning jenny and the cotton gin.
The fuel consumption of steam engines dropped from 44 pounds of coal per horsepower-hour in 1727 to 3 pounds in 1847, making it economical to use the steam engine for other purposes, such as trains. The dramatically improved fuel efficiency, combined with other improvements, made it economical to mechanise production elsewhere where wages were lower, interest rates were higher, or energy was more expensive. That allowed the Industrial Revolution to spread to other countries.1
It was a watershed moment. Until then, inventions were rare. Scientists made them out of curiosity. However, from then on, the profit motive generated a permanent drive to pursue knowledge and new technologies and to invent new products. In this way, economising through innovation and scale became a constant, unstoppable process that economists call creative destruction. Factories needed scale to operate profitably, while inventions birthed new industries and made others obsolete.
Humans have started a fire in their midst that continues to grow. We can’t stop it. A classic book on the Industrial Revolution used at universities is David Landes’ The Unbound Prometheus. According to Greek mythology, Prometheus stole fire from the gods and gave it to humans. The Greek supreme deity, Zeus, punished him for his act. The story parallels the biblical story of the Fall. The Industrial Revolution unleashed the unlimited fire of the gods that will devour us.
Since the Industrial Revolution, the general level of opulence has risen dramatically, though it was hardly noticeable at first. Industrialisation made craftspeople in the clothing industry destitute as they couldn’t compete with factories. Everyone else profited from cheaper cloth. Mechanisation made existing products like cloth more affordable, so people had money to spend on new products like light bulbs, making investing in new inventions profitable. Economists call it Say’s Law. More supply generates new demand.
Due to these innovations, production costs decreased, and industrialisation became profitable where wages were lower, energy was more expensive or interest rates were higher. Industrialisation first took off in Europe and North America, but not elsewhere. One reason is that Europeans had become innovation-minded and eagerly adopted new technologies like railroads and telegraphs. These first technologies were simple, thus easy to apply, but the Chinese and others remained reluctant to use them.2
Standard development recipe
Western Europe followed quickly, helped by the French Revolution and Napoleon Bonaparte’s reforms. The French Revolution wiped out the corrupt old French regime and replaced it with a modernised, efficient bureaucracy. The aristocrats lost their power. The French introduced civil registries, rationalised the law code, standardised weights and measures by introducing the metric system with kilograms and metres, and made everyone drive on the right side of the road. Napoleon’s armies then spread these reforms over Europe. Napoleon did to Europe what the first Chinese emperor did to China 2,000 years earlier. Both reigned shortly but left a lasting legacy.
Countries Napoleon didn’t conquer, such as Great Britain, continued to drive on the wrong side of the road and use arcane measures like miles and ounces. And only in Great Britain do aristocrats still influence politics through the House of Lords. To catch up, Western Europe and the United States followed a standard recipe consisting of the following elements:
Creating a national market by eliminating internal tariffs and building railroads.
Developing domestic industries by using external tariffs.
Instituting banks to finance investments and stabilise the national currency.
Establishing a mass education system to upgrade the labour force.
These measures had enormous social consequences, which we now refer to as modernisation. Societies came to replace communities. It was the age of nationalism. With the help of mass education, everyone learned the national language, and local dialects disappeared. People learned to identify with their nation rather than their kin and village. The outcome was that modern humans rely on markets and the state more than on their family and community.
Other countries implemented the same recipe but with modifications due to local economic factors. Factory layouts that operated at a profit in Europe were loss-making elsewhere. If energy were expensive, the operation would become more cost-effective using fewer machines and more labour. Japan was the first non-Western country to follow. The Japanese had to deal with local circumstances. High interest rates made investment capital expensive, so Japanese factories held no stockpiles of raw materials and semi-finished products but let their suppliers make them when needed. So, when interest rates rose in the late 1970s and early 1980s, Western industries couldn’t compete with Japan.
There are varying views on why industrialisation succeeded in some countries but not in others. If you dare to generalise, you can make the following observations:
East Asian countries like Japan, South Korea, Taiwan, and later China modernised successfully. They had a sense of nation and experience with rational government administration. Their bureaucrats and businesspeople successfully implemented modernisation projects.
Latin American countries were less successful. They were former colonies lacking national identities. Their white elites neglected the education of indigenous people. There were a few large estates and hardly any small-scale farmers. Wealth inequality prevented the development of a middle class.
The Soviet Union modernised with the help of state planning. Industrialisation of heavy industries succeeded, allowing the Soviet Union to defeat Nazi Germany. Agricultural reforms were a disaster, and consumer products were of poor quality. By the 1970s, it became clear the Soviet Union couldn’t keep up with the West.
Several countries in the Middle East modernised with dictators implementing socialist development models based on the experiences in the Soviet Union. Some Arab countries became wealthy from oil revenues. Few countries in the Middle East have developed industries that compete in international markets.
Africa lagged. African borders didn’t match the tribes living there, so there was no sense of nationhood. There have never been states in most of Africa. European colonisers ended traditional forms of government and property rights, contributing to poor governance and corruption. Africans started with a disadvantage.
Industrial politics
There are requirements for a modern economy, though a country doesn’t need to meet all of them. A capable government and an educated workforce can turn a situation around. Japan has few natural resources, but has become one of the most advanced countries in the world. It was the first non-Western country to industrialise. Japan was also lucky. After World War II, it had access to US markets because it was a close ally of the United States, which needed it to help it export its way into prosperity. Argentina had fertile land and was one of the wealthiest countries by 1900, but it has since then gone downhill. To successfully modernise, a country probably needs:
a capable government that understands economics and is business-friendly
an educated workforce as workers must read, write and use technology
businesspeople, investment capital, and sufficiently ensured property rights
a large enough market, thus a sizeable middle class
an industrial policy, thus picking industries to compete in international markets, helping to develop them, and supporting them with tariffs or subsidies
There are several kinds of industrial politics. Neo-liberal politics aim to pursue economic growth by promoting trade, lowering taxes, and reducing regulations. Unrestricted trade allows areas and people to specialise and compete to produce more and better products, enhancing overall opulence. It also promotes a race to the bottom at the expense of our future. Industries go where wages are lowest or where they can dump their waste and avoid paying for government services.
Making the economy sustainable and people-friendly also requires industrial policies, such as reducing competition and introducing regulations and controls. And it requires ending imports from countries that don’t adhere to the same ethical standards. A sustainable, people-friendly economy can only exist on a level playing field with other economies that adhere to the same standards. These measures increase costs and reduce living standards. An extreme case is the Old Order Amish. They choose to be self-sufficient and live simple lives. Their economic model resembles community economics.
Community economics aims to enable people in a community to help each other by buying and selling goods and services using local currencies. It never became a worldwide success because communities lack the scale for self-sufficiency. There is also a lack of commitment, which is something the Amish do have. Few people barter their labour or goods in their community if they can get better deals elsewhere. Commitment is vital. Without it, there will be black markets with merchants smuggling in illicit goods.
Featured image: Amish family, Lyndenville, New York. Public domain.
1. The British Industrial Revolution in Global Perspective. Robert C. Allen (2014). Cambridge University Press. 2. Sapiens: A Brief History of Humankind. Yuval Noah Harari (2014). Harvil Secker.
Mainland Europe and the Anglo-Saxon world, and most notably, the United States, are culturally related but have significant differences in views on law and morality that underpin their societies. These differences greatly influenced history, but their causes also lie in history. In the Middle Ages, individualism was already strong in Western Europe. While England developed its law system, the bureaucracy of the Catholic Church introduced Roman civil law on the continent. It had the following outcome:
Common law has become the basis of law in Great Britain and many of its former colonies, including the United States. Individuals are sovereign. Common law works bottom-up by generalising rules from judges’ verdicts in individual cases.
Civil law has become the basis of law in mainland Europe and most other countries. The lawmaker is sovereign, thus the king or the people as a collective via parliament. It works top-down by applying general rules to individual cases.
Common law resulted from the efforts of English kings to build a coherent law system based on local practices. In 1215, the Magna Carta limited the power of the English kings. England then had a strong state where the rule of law limited the king’s power. There also was individual liberty in Western Europe. There were few strong states while merchants ran independent cities. Still, the rule of law later came from the state’s power because of the differences in law foundations. These differences relate to views on ethics:
In Great Britain, philosophy, including ethical philosophy such as David Hume’s, is pragmatic. It says moral rules are an agreement in society, so good and evil depend on popular sentiments, freedom is being able to do as you please, and outcomes matter more than intent.
In continental Europe, idealism dominates philosophy, including ethical philosophy, such as that of Immanuel Kant. It says good and evil are absolute, freedom means liberating yourself from your lower urges, thus becoming rational and morally upright, and intent matters more than outcomes.
If ethical rules are relative, they emerge from popular sentiments, thus bottom-up, and if they are absolute, they come from principles and work top-down. The English philosopher John Locke imagined the state as a voluntary agreement of individuals to cooperate for mutual benefit. If you believe in individual sovereignty and moral relativism, that must be why there is a state. But it is incorrect. We will not voluntarily agree to a state if there is none but fight each other until there is one.
These differences later shaped the debate on the economic system, hence the intellectual battle between capitalism and socialism. Adam Smith wrote a practical recipe for running an economy in the British tradition. In continental Europe, the debate became fundamentalist and infused with moral sentiments. Frédéric Bastiat claimed socialism is an organised plunder of private property, while Karl Marx argued that capitalists steal the value workers create.
In the United States, with its moral pragmatism founded on individual freedom, the collectivist ideology of socialism never caught on. Still, progressives in the United States pursued reforms to rationalise the government according to modern bureaucratic principles, and there were unions. Great Britain became caught in the middle as Brits had a more favourable view of government than Americans and a strong socialist movement.
When, after World War II, the Soviet Union became an existential threat to the United States because the communists planned to overturn the capitalist order with violent revolutions and were building a large army, the defence of individual autonomy and moral pragmatism itself turned into an idealist moral crusade, also because the Soviets aimed to end religion and persecuted religious people. Most US citizens identified as Christians, so they came to see the Soviet Union as an evil, godless empire.
Hegelian Dialectic and Marxism
Around 1807, the German idealist philosopher Georg Wilhelm Friedrich Hegel devised a theory of how history would unfold according to God’s plan. It would occur by challenging the prevailing ideas and social order. The French Revolution had just swept away the old aristocratic French regime. The French adopted revolutionary new ideas from the European Enlightenment, modernised their government and introduced an army of conscripts, allowing Napoleon to conquer Europe and spread these ideas and reforms. Hegel was the proverbial fly on the wall, taking it all in. He was impressed. That was progress! Modern ideas wipe out old ones. A bureaucratic government with conscripts eliminated an aristocracy with mercenaries. The German Christian idealist philosophers like Kant and Hegel, and later, atheists like Marx, Nietzsche, and Heidegger, dedicated themselves to hard questions pragmatic people would never bother to spend a lifetime on.
As a profoundly religious man, Hegel thought that our knowledge and ideas progressed and that God’s plan worked like so. He believed humanity had a collective consciousness in which these ideas reside. He surmised we are progressing towards our final destination, God’s Paradise, by replacing our prevailing ideas with better ones. An example is our views on slavery. Slavery existed since time immemorial and was generally accepted, but most of us now see it as evil. These views we all share are what Hegel meant by collective consciousness. It evolves over time and thus progresses according to a stylised scheme called Hegelian dialectic. It works like this:
(1) there is a status quo (the thesis) (2) new ideas or conditions challenge the status quo (the antithesis) (3) from the challenge emerges a new status quo (the synthesis)
A synthesis is a more profound truth rather than a compromise. You can’t bargain on the truth. Hegelian dialectic is a ruthless pursuit of truth and accepting its consequences. Hegel is the philosopher of progress, not economic or scientific, but progress in society and its institutions. It is nearly impossible to overestimate his influence on politics in the centuries that followed as it often was about progressives versus conservatives, thus applying new ideas from philosophy and the sciences versus keeping things as they are. Not all new ideas are better, so the outcome can be that nothing changes. Ideally, the synthesis is the best solution that emerges from the challenge of the status quo. If the new ideas are superior, they wipe out the old ones. That requires revolution and violence, such as the French Revolution and the Napoleonic wars.
Being more pragmatic, the British reformed in smaller steps. The principal problem with Hegelian dialectic is that the scheme can have disastrous consequences if you don’t know everything. Your logic can be perfect, but if your assumptions are not, a small oversight can cause ruin, as in Barataria. Chaos theory says why. The leading conservative British thinker, Edmund Burke, aimed to improve the government, but only if necessary, because changes have unpredictable consequences. The British could do that because they already had a government open to reforms, while the French did not. A revolution was their only option to rid themselves of the corrupt old regime and clean the slate.
Karl Marx took the bait. We could achieve paradise ourselves here on Earth, he claimed. Scholars had already found out that much of the Bible was fiction, and Charles Darwin had just published On The Origin of Species with evidence indicating plants and animals emerged in a competition between species that has lasted millions of years rather than being created in six days 6,000 years ago. The sciences had proven religion wrong, so Marx thought religion keeps people dumb. Christians would wait for Jesus, who hadn’t shown up for over 1,800 years, and not take matters into their own hands. Marx also noted that Christians had betrayed their religion by adopting the ethics of the merchant. According to Acts, early Christians lived like communists.
Marx claimed capitalists profit by stealing some of the value workers create. He based his allegation on the labour theory of value, which economists of his time considered valid. The theory says that the price of an item equals the cost of labour required to make it, thus including the labour to produce the raw materials. If making a pair of shoes takes twice as much labour as making a pair of trousers, shoes cost twice as much as trousers. Marx then asked, ‘If that is correct, how can there be profits?’ It is because the theory is wrong. There is no objective measure of value. In a market economy, the price of an item depends on what people are willing to pay for it, not what it costs to make it. Otherwise, you could work a year on building a better mousetrap and sell it for € 50,000. Perhaps, after spending another € 50,000 on building a brand in a marketing campaign, you can sell it for € 200,000. That is how markets work.
Value is what we believe it is. Nothing is sacred. Everything is for sale, including the rainforests and even the Earth. The so-called owners think it is all theirs and can do with it as they please. In the market, a message becomes true if you can sell it. It works with advertisements or denying climate change. It is the evil in the ethics of the merchant, and because money represents power, we stare into the moral abyss. If you ever wonder why communists called their newspapers The Truth, that is why. But in a world without God, there is no truth, and communism is just another message on the marketplace. The communists appealed to the workers’ self-interest. And that was a poor sell because workers were worse off under communism. It is why communism was doomed to fail, not because it is impossible to live like communists. Early Christians did. Rather than concluding he had just proven the labour value theory wrong, Marx claimed capitalists stole from their employees.
Marx further said that producing for markets alienates us from what we make. Many workers experience this. It is why Dilbert comics are so successful. Marx claimed we could be free, creative beings, but the modern, technologically developed world dictates our lives. Marx believed ending the market mechanism and replacing it with democratic planning would liberate us. So if workers received what they owed and we replaced capitalism with democratic planning, we would live in a paradise where we can do the jobs we like and have everything we need. That is a silly idea. Many want to be a Hollywood star, but few want to be a cleaner. Immigrants do those jobs. Communes don’t attract farmers and construction workers but artists and reiki healers. We need food and homes, not art and quacks. Work is doing something useful, and if it isn’t useful, it isn’t work. And even if everyone contributes, planning will never do as well as markets. You could live with that if you have enough. You might want a pear, but you could settle for an apple. And you have heard of oranges but never tasted one.
Marx also claimed that capitalism causes misery as adding capital means doing more with fewer workers, which reduces the need for labour, pushing wages below the subsistence level and leaving workers to starve. At the time, most economists believed wages would remain close to the subsistence level. If wages increased, more people survived, expanding the labour supply. And so, wages would decrease, and more people would starve. The market would keep population levels in check. Marx argued that making more stuff with fewer people was impossible because the unemployed couldn’t buy it, and capitalism would bankrupt itself. It didn’t happen because of Say’s Law, as things became cheaper. And we can create money from thin air. When capitalists produce more, they must sell their merchandise, and you can make people borrow money, so the general level of opulence rises. Marx vastly underestimated human ingenuity in finance, marketing and job creation in the services sector and government, the so-called bullshit jobs in the bullshit economy. These jobs make sense because they solve problems in our complex society, but we could do without many of them when we live simpler lives.
Marx believed he was scientific and rational. He devised a theory of history using Hegel’s dialectic, arguing that power structures in society reflect economic conditions. To Marx, it was not new ideas challenging the status quo but economic conditions driving change in history. He would say that the status quo of serfdom in Europe ended because towns challenged it by providing alternative jobs for serfs. Lords had to compete with them for their labour. And so, employer-employee relationships replaced serfdom, which became the new status quo. Marx also believed nationalism was a temporary phase, as economic conditions imposed it on us. Industrialisation required larger markets, thus societies rather than communities. Nationalism allowed the elites to divide and rule the working class. And because capitalism would eventually bankrupt itself, Marx predicted, as if it was a logical certainty, communism would replace employer-employee relationships, and everyone would become free and equal. In reality, people aren’t free or equal under communism, and a new elite of party bureaucrats replaced the capitalists.
Marx’s plan for the future included violently overturning the existing capitalist order in revolutions like the French Revolution and Napoleonic wars. Karl Marx became the prophet of the most successful cult in recent history. Despite the failure of communism, the capitalism-socialism debate continues because Marx raised pressing concerns that are still valid today:
Instead of saying capitalists steal value from workers, you can argue we work to make the rich richer. Despite stellar economic growth in the United States, many workers still can hardly get by. And that is not because they are all lazy or stupid.
Instead of saying the system alienates us from what we produce, you can argue we are part of a system over which we have no control. We can’t democratically decide on issues like implementing artificial intelligence.
Instead of saying capitalism causes misery, we can argue it improved billions of lives, but it probably ends in a total disaster. We may know for sure once the ecological or technological apocalypse materialises.
Instead of saying we will enter the communist paradise as a historical necessity, we may argue the script is that we are about to enter God’s Paradise, which could be a Hegelian synthesis of Marx’s challenge of the existing capitalist order.
The moral void
European moral idealism and American moral relativism have consequences you might not think of. German philosophers from the Frankfurt School, knowing our religion, if we have one, depends on our birthplace, that Jews invented the Abrahamic God and that much of the Bible is fiction, sought more absolute foundations of morality, such as equality or preventing harm to other people. They embrace LGBT rights like marriage, as there is no objective moral reason to deny them. Even if you think gay marriage is unnatural because a gay couple can’t produce offspring, there still is no objective moral reason to deny them these rights, no matter what the Bible says. Idealism also drove Germans to endanger their energy security by closing nuclear plants and betting on solar and wind.
American moral relativism drives conservative Christians to impose their views on others, as they don’t ask hard questions, ignore evidence contradicting the Bible, and think they can do as they please rather than act as a rational, morally upright person. Critical theory, thus cultural Marxism or Woke, comes from German philosophers daring to ask hard questions to seek the absolute foundation of morality. Critical theorists also indulge in speculation. Many of their theories lack solid evidence. Believing, like Marx, that their ideas are superior, the Woke use Hegelian dialectic to attack conservative Christianity and impose their views on society. That is why Woke people are so annoying. In recent years, that debate has escalated rather than synthesised. It has turned into a culture war.
Conservative Christians, most notably those in the United States, are a peculiar bunch. Humans are the most destructive species that ever roamed the Earth, and there are far too many of them, so it is evil to ban abortions. If there is a moral objective measure for preserving a life, it is its degree of sentience. A human newborn can only suck milk, and no one remembers being born, while cows, horses and pigs stand upright and walk after birth. A cow or a pig is more conscious than a ten-week-old fetus, yet we slaughter them by the millions after treating them horribly in conditions as miserable as concentration camps. It is a Holocaust. You can better be dead long before you are born. Christians corrupted Jesus’ teachings to take away women’s rights and claim trans people are evil after giving God a sex change. They harp about an alleged conspiracy of Satanic child molesters in government while electing a sex offender who regularly attended Epsteins parties.
Liberals might think many Christian conservatives are crazy to believe raving nutcases like Qanon, but we cooperate using shared imaginations, so it is perfectly normal human behaviour. How do you think religions survive despite the facts disproving them? And the only measure of success is success. Truth hardly ever is the reason why beliefs prevail. Even scientists have invisible imaginary friends like gravity. Believing that gravity exists makes you succeed in engineering. The foundations of liberalism and socialism are also incorrect, like human nature being inherently good. We like to think we are good, so these ideologies have been successful. And success breeds stupidity. If you fail, you might ask the correct questions, but when you are successful, you have no reason to. And so, rational government is an uphill battle against our inner nature, and real change is only possible after complete failure. Christianity is much closer to the truth. We are morally depraved, incapable of fixing ourselves, unworthy of God’s grace, and in need of a saviour.
Liberals are wrong and foolish because the evolution theory they believe in says the struggle for existence is brutal. They should have reasoned, like Friedrich Nietzsche, that God is dead and that the strong should rule the weak. Somehow, they couldn’t rid themselves of their Christian slave morality. The former right-wing Dutch politician Pim Fortuyn called them the Leftist Church. Without God, we get lost in the moral void, and it is pointless to try to achieve Paradise on Earth. After several wars to impose liberal Western values on countries like Vietnam, Iraq and Afghanistan, we can say good intentions usually make things worse rather than better. Why send money and weapons to a corrupt country like Ukraine to let it fight against an even more corrupt country like Russia? And why do liberals support the corrupt establishment of big banks, big pharma, the mainstream media and the military-industrial complex they objected against in the past? But many Christian conservatives don’t even make a small effort to become slightly less evil, like skipping meat one day per week. Appeals to moral reason infuriate them. And now the crazies organise a witch hunt against science and the rule of law. The road to hell may be paved with good intentions, but being intentionally evil is a shortcut.
Suppose Jesus was human like us with the knowledge of his time, which non-religious biblical scholars would agree on, and someone else finds himself in his position today. What could he do? He could wait for God to tell him, but if God doesn’t, he might think, like Marx, that he has to figure it out himself. As far as we can infer from the scriptures, Jesus acted independently but according to God’s will. He was like an actor following a script. His successor has the benefit of today’s knowledge, including the simulation hypothesis and the sobering outcome of the communist experiment. He might grasp the greater picture. The Marxist challenge of the existing order could have been God’s way of showing us the choices we face, our alternatives, their consequences, and what the synthesis might look like. That makes Hegel one of the greatest prophets of modern history.
Most people in the West now believe there is no alternative to capitalism, even though we may need some socialism or government to contain its ills. That could make our economy less competitive, which could cause us to lose the competition. So, in the end, there is no alternative, not because we can’t live happily in another economic system but because other systems can’t compete. Other ethical systems can’t compete with the ethics of the merchant either, which says you can do as you please and take what you can. It is much easier to break a collective effort like combating climate change than to build it. Only one major country needs to step out. In competition, those with the most depraved ethics win. The Dutch would say the merchant always wins from the vicar.
Only there needs to be an alternative. The profit motive is the severest threat humanity has ever faced. It pushes for permanent innovation, a process of creative destruction over which we have no control. We have started a fire in our midst that grows until it consumes us. Our greed is its fuel, and we can’t stop it. We may soon destroy ourselves creatively. We can’t kill the beast, the system, and the beast within ourselves, our greed. Communism is oppressive, kills creativity, and promotes stagnation by eliminating the profit motive. That sounds awesome because that is precisely what we need.
It looks like a cure. If your disease is cancer, and the cure is chemotherapy, you take the poison, and you accept becoming sick and losing your hair. Otherwise, you die. You could visit a witch doctor or a quack, and you also die. Many fall for snake oil salespeople because science doesn’t always have the correct answers. But despite their limitations, the sciences and the evidence from history are our best knowledge. If capitalism and communism are the only options, a sensible person chooses communism. Communism has brought a lot of misery, and we haven’t seen the end of civilisation yet, so we can still believe it will work out fine as long as markets remain operational and bring together supply and demand. That is perhaps the biggest lie ever.
If you don’t get by now why the ethic of the merchant is the greatest evil of all times, you are a moron, and there is no point in trying to convince you. By electing Donald Trump, Americans demonstrated their willingness to let Satan run their country. If following Satan seems the lesser evil, then something must be profoundly wrong. The corrupt old order of the military-industrial complex, big pharma, big banks and other interest groups seeking to profit from the state has ended the legitimacy of the US government. The other candidate and the billionaires backing her believed they could buy the presidency by spending billions on her political campaign. And for the record, Donald Trump isn’t Satan, not even the Antichrist, but just a huckster with the most depraved moral values and the ultimate embodiment of the ethics of the merchant, the ultimate evil.
In a world without God, there is no justice. And we can’t halt our descent into the moral abyss. And we have the ultimate proof. Once the technology is there, some of us will become like gods, live for thousands of years, make virtual worlds in which they force everyone to comply with their wishes, and murder people for merely standing in the way or for any other arbitrary reason. It is why we exist. God is an individual from an advanced humanoid civilisation who wants to have some fun. You are nothing, even less than a worm, as a genuine worm decides for itself how to grovel and when. Let that be a warning. And you own nothing. Believing you are entitled to something is thinking you can steal from God. With these words, I conclude my sermon. Now, let us pray.
In a world without God, there is no justice. And we can’t halt our descent into the moral abyss. And we have the ultimate proof. Once the technology is there, some of us will become like gods, live for thousands of years, make virtual worlds in which they force everyone to comply with their wishes, and murder people for merely standing in the way or for any other arbitrary reason. It is why we exist. God is an individual from an advanced humanoid civilisation who wants to have some fun. You are nothing, even less than a worm, as a genuine worm decides for itself how to grovel and when. Let that be a warning. And you own nothing. Believing you are entitled to something is thinking you can steal from God. With these words, I conclude my sermon. Now, let us pray.
Third ways
There have been several attempts to come to a synthesis of capitalism and socialism, which is often called the Third Way. The challenge of Marxism, the antithesis of capitalism, fuelled a lively debate about economic systems in the second half of the 19th and the first half of the 20th century. Silvio Gesell, who wrote Barataria, was one of the central figures in this debate, as was Henry George in the United States. Since the Cold War, the debate has narrowed down into a struggle of communism versus capitalism or individual freedom versus enforced collectivism. With the collapse of the Soviet Union, the discussion in the West ended with the conclusion that Marx may have had valid concerns, but we can’t fix them, and his solutions are counter-productive. The Chinese government, however, kept innovating and remained determined to make socialism work.
You can’t compromise with ultimate evil. That reasoning made the Soviets replace markets with state planning. And it made their repression so ruthless and bloody. Millions died of starvation, and millions more ended up in concentration camps. In the end, it is better to be a slave in Paradise than a free man in hell, except when hell looks like Paradise and Paradise is like hell. But profit and greed corrupt everything. Self-regulation under neoliberalism, thus allowing corporations to set and enforce their rules, demonstrated why corporations need a tight leash and operate for public benefit rather than private profit. So, the question remains whether a third way is possible at all. Or can we only make socialism work better and more agreeable?
Such a change requires the support of a large majority of the people. The Russians lost faith in the Soviet experiment as central planning produced poor outcomes. Still, the Chinese economy has baffled the proponents of capitalism. The Chinese allow the profit motive to exist as long as businesses conform to the Chinese Communist Party’s objectives. State ownership of enterprises further ensures that. Similarly, you can allow profit motive within society’s goals and place large corporations in sovereign wealth funds. To clarify the discussion, as there is confusion in terminology, it may be best to provide you with definitions of economic systems. Their differences centre around ownership of resources, capital, and labour.
resources
capital
labour
communism
state
state
state
socialism
state
public
private
third way / mixed
varies
varies
private
capitalism
varies
private
private
Under communism, the state owns everything, including your labour. You can’t even decide on the job you take. Under socialism, you can choose your occupation, but capital is public, thus owned by workers or the state, and the state owns the natural resources. In mixed economies, ownership of natural resources and capital varies. You may own the ground, but if oil is underneath, it may belong to the state. There may be state-operated corporations like railways alongside private corporations. And you are free to choose your occupation. Under capitalism, everything is private. There may be public services, but there are no public corporations. And few countries give their resources away for free, and governments nearly always want a piece of the action. Not even the United States is fully capitalist. Libertarians think that is the problem, so if we gut the government and make everything private, the invisible hand, thus greed and competition, will fix things as if being foolish doesn’t help, being more foolish might.
The same model still gives different outcomes under different circumstances. A crucial factor is the culture or spirit of the nation. There were substantial differences in living standards in the Soviet Block. Czechoslovakia did relatively well. Yugoslavia suffered from high unemployment, but the Slovenian unemployment rate never exceeded 5%, while Macedonia and Kosovo had rates of over 20%. These were extreme differences within one country and the same system. China has developed its economic model, a state-run socialist market economy, which now outcompetes the West. Its success depends on the Chinese people’s hard work and ingenuity, China’s long-standing tradition of a modern bureaucratic government, and Confucianist ethics, making the government work in the public interest. The Chinese had a modern bureaucratic government on rational principles 2,000 years before Europe. And so, this economy wouldn’t have emerged elsewhere.
Making idealism work still requires pragmatism because good intentions can give horrible outcomes. Americans are pragmatic and gung-ho, thus eager to get things done. So once they realise God’s vision for the future goes against some core principles of American society, like individual liberty and capitalism, they might reverse course and take up the challenge with zeal. Europeans are not like that. They have a wait-and-see attitude at best. The Germans will try to engineer an even better system. The Dutch will deliberate the proper procedure and hire consultants to write reports. The Italians will bumble. And the French will go on strike. Many Americans are also more religious and more willing to embark upon an outlandish plan if they believe it is the way forward.
Free Economy
There are other options than communism or socialism. They can be safe as long as the ethic of the merchant doesn’t reassert itself. As soon as you allow it, the moral depravity spreads like cancer and will destroy society, like in the tale about the imaginary island Barataria. Only communism and brute repression are 100% safe. Religion can inspire us to stay public-spirited and be content with what we have. So if God exists and sends a messiah, we could play it less safely because whatever happens is God’s will.
For a while, Barataria had an economy with free enterprise and private ownership of homes but without capitalists, bankers, and merchants. Barataria had no income taxes, but the lands were public, and farmers rented them, which paid for the small government. Because the Baratarians were public-spirited and helped each other, and most notably, because there were no merchants, they didn’t need much government. That might be as close to Paradise as we can get. But it will only work if we live simple lives.
Silvio Gesell believed in economic self-interest as a natural and healthy motive for satisfying our needs by being productive. He aimed for free and fair competition with equal chances for all. He proposed the end of legal and inherited privileges, so the most talented and productive rather than the most privileged would have the highest incomes without distortion by interest and rent charges.
After experiencing an economic depression in Argentina in the 1890s, Gesell found that economic returns sometimes didn’t meet investors’ minimum requirements. It caused investors to put their cash in a vault like Scrooge McDuck, emptying the money flows and collapsing the economy. A holding fee can keep the currency in circulation, as low returns are more attractive than paying that fee, which amounts to a negative interest rate. Gesell’s economic system was well-known in Germany as the free economy.
European Union
European economies are mixtures of capitalism and socialism. Many Brits found the union too socialist and bureaucratic, so they left. These sentiments relate to the age-old differences in law and morality. The European Union tries to tame the beast of capitalism with regulations, which may fail if the competition continues and intensifies, but many Europeans now live a good life. Well-being is hard to measure, but European societies are among the world’s most agreeable if you believe the rankings. And if every country kills innovation with legislation like the bureaucrats of the European Union, we wouldn’t need to fear artificial intelligence, genetic engineering or any other new technologies.
Europe has a collectivist tradition with Christian and socialist roots with worker and consumer protection laws. Europeans live longer than Americans, partly because the European Union has banned unhealthy foods available in the United States. At the same time, governments run the healthcare systems, so most healthcare is for the public interest rather than private profit. In Europe, it is harder for corporations to pass business-friendly legislation by bribing politicians. That is also because Europeans believe in the common good more than Americans do. Like the invisible hand, our imaginary invisible friend, the common good, has a few magical powers.
As in the United States, immigrants do much of the hard manual labour in Western Europe, often for lower wages, without these protections and crammed in poor housing. There is a profit in dodging regulations for shady merchants. Western Europeans may be lazy because they work 36 hours per week and have five weeks of holidays each year. Still, their lives are the closest to what life should be in Paradise, except that European energy and resource consumption require a drastic 75% cut to make their economies sustainable. But if we dismantle the wasteful bullshit economy and set the right priorities, we could work fewer hours than Europeans do today and still have an agreeable life.
Nazi Germany
The Nazis produced an economic miracle during the Great Depression. The success came from deficit spending for rearmament and limiting trade with the outside world, so the expenditures boosted the German economy while not causing trade deficits. It is similar to Keynesian economics. It worked like the miracle of Wörgl, except that the German government accrued a large debt while the council of Wörgl did not.
Factories were idle, and many people were unemployed, so the scheme didn’t result in high inflation. Price, wage and rent controls also helped keep inflation in check, but it hurt small farmers. The Nazi economy was a mixture of state planning and capitalism. Germany was rearming and preparing for war. It was a war economy. Countries organising for war take similar measures to mobilise their industries for warfare.
Yugoslavia
Yugoslavia was socialist rather than communist. It combined state planning with markets and decentralised decision-making or worker self-management. The Yugoslav economy fared much better than that of fully communist countries. The country was more open, and living standards were higher. However, it began to suffer from mass unemployment, and the economy collapsed in the 1980s as it couldn’t compete with capitalist economies. Generous welfare spending further contributed to Yugoslavia’s economic demise.
The oil crisis of the 1970s magnified the economic problems, and foreign debt soared. The country implemented austerity measures like rationing fuel usage and limiting the imports of foreign-made consumption goods. Unlike the Soviet Union, Yugoslavia had been able to feed its people until then. From the 1970s onwards, the country became a net importer of farm products. Yugoslavs were free to travel to the West. Emigration helped the economy by reducing unemployment and bringing in foreign currencies as emigrants returned money home to support their families.
Its openness to foreign competition contributed to the collapse of the Yugoslav economy. Yugoslav consumer products were often inferior to Western products. To compete, businesses laid off workers to become more efficient. The Yugoslav economic system might have worked if all countries had operated their economies like Yugoslavia. Yugoslav products would have sufficed if there were no better alternatives. Mass unemployment might not have materialised in that case, and Yugoslavia could have managed, perhaps, with less generous welfare. That is a few maybes, but it is plausible.
China
The stories of Airbus and Boeing demonstrate that state ownership of large businesses can work better than private ownership. Boeing was the industry leader but ruined itself by focusing on shareholder profits. Reducing quality brought short-term cost savings, boosted the stock price, and generated management bonuses. That seemed all fine until the Boeing aeroplanes began dropping from the sky. The largest holders of Airbus stock are European states, allowing the corporation to focus on long-term goals. The state-owned aeroplane industry is one of the few areas where Europe is still at the top.
Traditional communism gave subpar results, but the Chinese managed to get it right. The Chinese socialist market economy (SME) has private, public and state-owned enterprises (SOEs). China is not capitalist, as the Chinese Communist Party (CCP) retains control over the country’s direction. It is a command state-market economy like Nazi Germany was. Unlike Nazi Germany, which aimed for maximum self-reliance and ran on military spending, the Chinese economy integrated into the world economy and ran on exports. It resembles other Asian Tigers, such as Japan and South Korea.
The CCP’s vision behind starting market reforms is that China was underdeveloped and that a fully developed socialist planned economy would emerge once the market economy fulfilled its historical role, as Marx prophesied. Thus, the CCP believes it has incorporated a market economy into the Chinese socialist system. Others call it state capitalism, as the SOEs that comprise a large portion of the economy operate like private-sector firms and retain their profits without returning them to the government.
China eliminated extreme poverty, which declined from over 90% in 1980 to less than 1% today. It also became the world’s leading manufacturing economy and the world’s leading producer of unnecessary items that end up in our landfills. Despite its leadership in renewable energy and electric cars, China has also become the world’s leader in pollution and carbon dioxide emissions. However, China’s status as an exporter distorts the picture. By importing from China, other economies appear to be less pollutant.
The Chinese economic model forces corporations to align with society’s goals and make profit secondary. At the same time, it achieves acceptable living standards. It is modern and outcompetes the US and European models. If our society’s goals change from growth to sustainability and happiness, the Chinese economic model can help align corporations with public policies. China is a dictatorship, but its economic model will also work in democracies. Airbus provides the evidence.
State control and ownership of businesses, like China’s, also seem to be the only viable way to pursue political goals such as protecting nature and reducing poverty. Business objectives like profit should be secondary to these political goals. With state ownership, you can ban products or subsidise others without harming or favouring private entrepreneurs, thereby removing the incentive for corruption. China is on the right track as political objectives precede profit. And so we have evidence. China’s economy produced spectacular results, so we can have confidence that it will bring us acceptable living standards while allowing us to live in harmony with nature and end poverty.
In the past, ordinary people regarded merchants and bankers with suspicion. In popular culture, trade and banking were the domains of people of questionable ethics. Merchants are as slippery as eels, so it is hard to pin down the issue, but everywhere you see the death and destruction they cause. Hermes, the Greek god of trade, was also the god of thieves. Jesus Christ chased the money changers from the Jewish temple. In The Parable of the Talents, however, Jesus said that you must put your qualities to work. Talents were money, so it could mean putting your money to work. And Jesus said that it is easier for a camel to go through the eye of a needle than for a rich man to enter the kingdom of God.
Jesus lived 2,000 years ago. Economics as we know it now didn’t exist, so we can’t blame him for lacking a consistent view on economics. Someone claiming to be Paul added that the love of money is the root of all sorts of evil. The Jewish sage Jesus Sirach noted, ‘A merchant can hardly avoid doing wrong. Every salesman is guilty of sin.’ The Jews and Protestants excluded him from their canons, but his musings are in the Catholic Bible. Greed, or the pursuit of profit, drives trade. Traditional moral systems considered it wrong. We have gone a long way since then. Today, we hold a different view and see trade as mutually beneficial, so those who engage in trade do so voluntarily because they all benefit. Eels are very slippery indeed. And so are merchants.
Today, trade and finance are at the core of our economic and moral system. And so, Friedrich Hayek could write, ‘The disdain for profit is due to ignorance and to an attitude that we may, if we wish, admire in the ascetic who has chosen to be content with a small share of the riches of this world, but which, when actualised in the form of restrictions on others, is selfish to the extent that it imposes asceticism, and indeed deprivations of all sorts, on others.’ Our ethic is that we can do as we please, as if consequences don’t exist. And the ascetic is selfish when he says everyone should live like him. It is moral depravity at its finest. And so, what was good has become evil, and what was evil has become good.
The problem is not self-interest as such, but greed or the ethic of the merchant, and that the difference isn’t clear. Many merchants are people like you and me without evil intent. Shop owners make a living like everyone else and provide their customers with a service. They are often people who care, not the greedy, evil kind that run Wall Street or sell weapons to warring factions in Africa. But something is profoundly wrong with trade. Even a shop owner doesn’t produce something. They provide a service by trading in markets. And individual merchants may have ethical values, but markets never have them. Everything is for sale. Suppressing trade promotes illicit markets and crime. And so, we accept the drawbacks, thinking the alternatives are worse. That is a fatal mistake.
A pragmatic approach says that outcomes matter more than intent, so if the result of nefarious intent, like greed, is good, it is good. And if the outcome of good intent is terrible, it is wrong or perhaps even evil. If factory owners destroy artisans’ businesses and pay their employees low wages, but overall opulence increases as cloth becomes cheaper, then it is good. Likewise, if a country switches to socialism out of good intentions, but the population starves, it is evil. Before the Industrial Revolution, nearly everyone was as miserable as today’s poorest. Capitalism has lifted billions out of poverty. So why bother?
Trade and finance became the engine of growth, bringing industrialisation, modernisation, colonisation, the slave trade, mass migration, the loss of livelihoods for craftspeople, and the depopulation of the countryside. Various movements, such as socialists, anti-globalists, religious groups, small-is-beautiful, and environmentalists, attempted to provide alternatives to the current order with their visions of Paradise, but they all failed. The system is amoral, a brute force driven by our sentiments and urges. As consumers, we crave the best service at the lowest price, and as investors, we desire corporations to increase their profits. And we don’t think about the consequences.
Usury: the destroyer of civilisations
Money is to the economy what blood is to the body. It must flow. Otherwise, the economy will die. If we stop buying stuff, businesses go bankrupt, we become unemployed, the government receives no taxes, and everything comes to a standstill. That never happens because we spend money on necessities like fast food, smartphones, and sneakers. When we buy less, the economy slows, and we enter a recession, or if it gets worse, a depression. Businesses disappear, and people become unemployed and depressed. Usually, the economy recovers, but it may take time, sometimes decades. It is why we must keep buying stuff, and even more, to make the economy grow.
In the past, when borrowers couldn’t repay their debts, they became the moneylenders’ serfs. It is why several ancient civilisations had regular debt cancellations and why religions like Christianity and Islam forbade interest on money or debts. Usury is paying for the use of money, which is a profoundly evil practice. The evil of it lies in the money flows. We all need a medium of exchange. A simple explanation helps to clarify the issue. Imagine the Duckburg economy running on 100 gold coins. With these 100 gold coins, everyone has enough money, and the Duckburg economy operates smoothly. Scrooge McDuck owns ten, but he is a miser and doesn’t use them to buy items from others.
The economic flows of Duckburg now suffer a 10-coin shortfall. Products then remain unsold, and several ducks lose their jobs. To prevent that, Scrooge McDuck can lend these coins for one year at 10% interest to ducks who come short, so the money keeps flowing. At the end of the year, the economy is 11 short. Scrooge McDuck then lends 11 coins at 10%. In this way, he will own all the coins after 25 years. Scrooge McDuck can implode the Duckburg economy by keeping the money in his vault. When the citizens of Duckburg become desperate, Scrooge McDuck can buy their homes, let them pay rent, and become even richer. If you think that is smart, you have the ethics of a merchant. It demonstrates why, in traditional popular culture, merchants and bankers were evil.
Two things have changed since then. Starting with the Industrial Revolution, economic growth picked up, which helped to pay for the interest charges. The nature of money has also changed. It isn’t gold anymore. Nowadays, banks create money from thin air, so the nature of usury has also changed. When you go to a bank and take out a loan, such as a car loan, you get a deposit and a debt that the bank creates on the spot by creating two bookkeeping entries. The deposit becomes someone else’s money once you purchase the car. When you repay the loan, that bank deposit and the debt disappear. You must repay the loan with interest. If the interest rate is 5% and you have borrowed € 100 for a year, you must return € 105.
Nearly all the money we use is deposits created from loans that borrowers must return with interest. Banks might pay interest on deposits. The depositors of a bank act like Scrooge McDuck. They have more money than they need and keep it in the account at interest. If they have borrowed € 1,000,000 at 5% interest, they must return € 1,050,000 after a year. Where does the extra € 50,000 come from? Here are the options:
borrowers borrow more;
depositors spend some of their balance;
borrowers don’t pay back their loans;
the government borrows more or
the central bank prints the money.
Problems arise when borrowers don’t borrow and depositors don’t spend their money. In that case, borrowers are € 50,000 short, and some can’t repay their loans. If many borrowers can’t, you have a financial crisis. Borrowers can reduce their spending to pay off their debts, leading to a slowdown of the economy. The economy is also unstable due to investor expectations. They expect more in the future. If debts remain unpaid or people stop spending, they incur losses and may lose trust and stop investing.
If they lose trust, they stop investing, less money flows into the economy, businesses go bankrupt, people become unemployed, and more borrowers get into trouble. As a result, even less money flows, causing banks to go bankrupt. Economists call it deflationary collapse. That happened in the 1930s, causing the severest economic depression in modern history. There was no money in the economy because lenders feared losing it. To prevent that from happening, governments run deficits and central banks print currency whenever there are shortages in the money flows. With interest on debts, these things are hard to avoid. But if the system never collapses, debts and interest payments only grow.
The 2008 financial crisis could have been much worse than the 1930s, potentially leading to the collapse of civilisation as we know it. That was due not only to the accumulation of far more debts but also because most people now live in cities, where they have become dependent on markets and governments. In the 1930s, most people still lived in the countryside. Central banks prevented a collapse by printing trillions of US dollars, euros, and other currencies. The shortfall was that enormous. We now buy our necessities in shops and rely on the government to keep the system running. We have not only become the usurers’ hostages, but also the hostages of markets and governments.
Barataria: an economic fairy tale
Money equals power, and the lure of riches corrupts us, so the alternatives to the system of trade and usury have failed. They can’t compete. A few people step out, but it is like a rehab from a consumption addiction. It is a sober life while everyone around you keeps on living the good life. After us, the deluge is the prevailing mood. The deluge is already taking off. Storms feed on the warming sea water and leave their burden on our shores. But what are our options anyway? In the early 1990s, the Strohalm Foundation published The Miracle Island Barataria, an economic parable by the Argentinian-German economist Silvio Gesell.1 I rewrote the narrative somewhat to better highlight its message. Gesell explores three options: (1) communism or socialism, (2) a market economy without traders and bankers, and (3) a fully capitalist economy.
In 1612, a few hundred Spanish families landed on Barataria, an island in the Atlantic, after their ships had sunk. The Spanish government believed they had drowned, so no one searched for them, and they became an isolated community. They worked together to build houses, shared their harvests, and had meetings in which they decided about the affairs that concerned everyone. It was democracy and communism. After ten years, the teacher, Diego Martinez, called everyone into a meeting. He noted that working together and sharing had helped them build their community, but the islanders had become lazy. They came late to work, took long breaks, and left early. They spent their time at meetings discussing what to do, but much work remained undone.
‘If someone has a good idea, he must propose it in a meeting to people who don’t understand it. We discuss it but usually we don’t agree or we don’t do what we agree upon. And so, nothing gets done and we remain poor. We could do better if we have the right to the fruits of our labour and take responsibility for our actions,’ Martinez said, ‘The strawberry beds suffered damage because no one had covered them against night frost.’ He mentioned several other examples. Martinez said, ‘If the strawberries are yours, you protect them. And if you have a promising plan you think is worthwhile and you can keep the earnings, you do it yourself and hire people to help you.’
He proposed splitting the land into parcels and renting them to the highest bidder to finance public expenses. Fertile lands would fetch a higher price than barren ones, giving everyone an equal opportunity to make a living. He also proposed introducing ownership so the islanders would feel responsible for their property. But with property, you need a medium of exchange or money. The islanders decided to use potatoes as money. Everyone needed potatoes. They had value, so they were good money.
Potatoes are bulky, thus difficult to carry, and they also rot. At the next meeting, Santiago Barabino proposed setting up a storehouse for potatoes and issuing paper money, which could be exchanged for potatoes when needed. So, you had banknotes of 1, 2, 5 and 10 pounds of potatoes. The Baratarians agreed. The notes had a date of issue and gradually lost their value to cover the storage cost and rot. If you returned the banknote to the potato storage after a year, you received 10% less. And because the issue date was on the banknote, buyers and sellers knew its value.
For several years, Barataria had banknotes representing stored potatoes. Their value declined over time to pay for the storage and the rot. Borrowers didn’t pay interest. If you had savings, you would lend them to trustworthy villagers if they agreed to return notes representing the same weight. The notes lost value, making everyone spend their money quickly and store items and food in their storehouses. The general level of opulence rose, but there were no poor or rich people. There were no merchants buying things at a low price to sell them at a high price. Businesses didn’t pay interest, and there were no merchants, so things were cheap in Barataria. The chronicle notes that the islanders acted as good Christians and helped each other.
Then Carlos Marquez had a new idea. He addressed Baratarians, ‘How many losses do housewives suffer from keeping food in their storehouses? We shouldn’t put our savings in perishable products, but money with stable value. We can back our money with something we don’t need and doesn’t deteriorate. The Pinus Moneta is a nut we can’t eat, and doesn’t rot,’ he said, ‘We don’t have to back money with a commodity of value like potatoes. The things we buy and sell give the money its value. If we do that, we can buy things when we need them and don’t have to store them ourselves.’
What a great convenience that would be. It seemed too good to be true. Diego Martinez argued against the proposal. He told his fellow islanders that a medium of exchange passes hands. It remains in circulation. But savings stay where they are unless those who are short of money borrow them and pay interest. You end up paying interest to use the currency you need to buy the things you need. His argument was to no avail. And that is the price of democracy. People often decide about questions they don’t understand.
Most islanders preferred to spend their time getting drunk in the pub instead of studying the issues of government. And if you are doing well, you can’t imagine that seemingly insignificant errors can ruin you. Marquez spoke passionately, while Martinez warned cautiously, saying things were fine as they were and he couldn’t foresee the consequences. That swayed opinions. The islanders switched to money backed by the Pinus Moneta. This money didn’t lose its value. That made it attractive to save money.
Suddenly, everyone tried to exchange their supplies for the Pinus Moneta, causing mayhem in the marketplace. Everyone brought everything they had to the market. But no one could sell their goods because everyone wanted money. That was until the company Barabino & Co came up with a plan. Barabino & Co. set up a bank with accounts that Baratarians could use for saving and making payments. Everyone could bring their money to the bank and receive an extra 10% after a year. The naive Baratarians agreed. They could have known there weren’t enough nuts of the Pinus Moneta to pay the interest. And they didn’t ask themselves how Barabino & Co. would generate the profits to pay that interest. With this borrowed money, Barabino & Co. bought goods from the islanders and deposited money into their accounts, but Barabino & Co. only purchased food and seeds.
The following spring, Barabino & Co. hiked food and seed prices. Most islanders paid more for food and seeds than they received in interest. They went into debt with Barabino & Co. With the profit, Barabino & Co. bought the next harvest and cranked up food prices even further. Soon, Barabino & Co. owned everything. Most were in debt and worked hard, but a few wealthy people lived off interest income. They didn’t work and lived a life of luxury on the interest on their accounts. The Baratarians needed money to pay for the items they bought from Barabino & Co. They had to borrow this money from Barabino & Co. and pay interest to use it. There weren’t enough nuts to pay back all loans with interest, so the islanders went further into debt year after year. They paid interest on money the bank created out of thin air, giving it to the wealthy. That is usury.
The Baratarians worked harder and grew more creative in earning money. The islanders invented, produced and sold more products, most notably wooden items made from the trees on the island. Not everyone could keep up, and more people lived in the fields. At least, the economy grew, and the Baratarians grew accustomed to luxuries they hadn’t had before. They had wooden chairs, boxes, ornaments, toys, outhouses, carts and tables. The islanders had managed without these items before, but now, they believed they needed them.
The change came with other unfavourable consequences. The Baratarians became agitated, deceitful, and immoral. Crime rose as everyone desired the luxuries that the rich enjoyed, and for which they didn’t have to work. Of their Christian faith, not much remained except an empty shell. They were busy making money. Then came the day the Baratarians had cut down all the trees on the island. They suddenly lacked the wood needed to make the tools for harvesting their crops, and they starved. That was the day the Pinus Moneta lost its value. After all, you can’t eat money.
Adam Smith and the Wealth of Nations
The tale tells how devious acts contributed to an outcome most of us now deem desirable. By selling our souls to the money god, most of us have a better life than people in the Middle Ages. That improvement came with wars, colonialism, the slave trade, pollution, and miserable working conditions, and ultimately, it could bring the end of human civilisation. With the help of saving and investing, capitalists build their capital. Capitalism is about making sacrifices in the present by saving to have a better future via investing. It also led to a mindless process called competition via innovation and economies of scale. Economists call it creative destruction.
In the original tale, the wood didn’t run out, but the British rediscovered the island to find a class society much like theirs. The story tells how devious acts contributed to an outcome most of us now deem desirable. By subjecting ourselves to this system of trade and usury, most of us live a more agreeable life than people in the Middle Ages. It came with wars, colonialism, the slave trade, pollution, miserable working conditions, the destruction of communities and societies, and, eventually, the end of human civilisation. With the help of saving and investing, capitalists build their capital. Capitalism involves making sacrifices in the present by saving to have more in the future via investing. You can always do better. It promoted competition via innovation and economies of scale. But there is no ultimate goal, a vision of Paradise, only creative destruction without end.
The Baratarians were in debt, worked hard and were creative. Those who couldn’t keep up became homeless. As there was never enough money to pay back the principal with interest, the Baratarians went deeper into debt, worked even harder and became more creative by inventing and selling new products, producing an economic boom that ended in starvation once the trees were gone. It looks like the problem we face. The Earth’s resources are finite, and interest accumulates to infinity. Our money becomes worthless once there is nothing left to buy or sell.
Adam Smith, the founder of modern capitalist thought, claimed that pursuing our private interests promotes the public good. A baker doesn’t bake bread to serve the community but to make a living. It is why we have something to eat. The baker doesn’t want to lose customers, so he bakes what they desire. Otherwise, they go to his competitor. Smith believed it would work out well as humans are moral creatures. We temper our behaviour as it affects others. Therefore, moral relativists could argue that we don’t need public interest. The private interest will do just fine. But it is not how markets operate. We may have ethical values, but markets never have them. The least scrupulous usually wins the competition, so the greater evil usually wins in the markets. We have found that out and now want governments to oversee the markets.
Factory owners didn’t consider the plight of the artisans they put out of business or the miserable working conditions of their workers. They would have gone out of business if they had done so. Moral considerations don’t drive business decisions, so psychopaths end up in high places in corporate management.2 These psychopaths in business provide us with harmful products like cigarettes, prostitution, gambling casinos, and semi-automatic rifles. They expand their market by advertising their wares. A merchant will say, ‘If I don’t supply the market, someone else will, so why not profit from death and destruction myself?’ The merchant then claims liberty is the highest value, and restricting markets equals oppression, thus the ultimate evil. Why not let everyone buy cocaine and semi-automatic rifles? It increases GDP. These are the morals of the merchant we now live by.
Without self-interest and trade, we would be poorer, and poverty was Smith’s primary concern. Increasing production was the way out. Self-interest and trade were the tools to achieve that. It succeeded marvellously. Since the Industrial Revolution, production increases have lifted billions of people out of poverty. Adam Smith argued:
The division of labour drives production increases. If you specialise in a trade, you can do a better job or produce more at a lower cost.
A market’s size limits the division of labour. Transport costs limit market sizes. Energy cost drives the volume and distance of trade.
Merchants preferred precious metals as money. It enabled them to store their gains, allowing them to wait for opportunities to make financial profits.
Producers produce items at different times, in different locations, and in different quantities than consumers need. That is why we trade. Traders bridge those gaps by storing, transporting, and dividing goods. Trade promotes large-scale production and labour efficiency, so fewer people provide for our necessities. That allows for more fanciful products and services and industries, thus a higher standard of living.
The evil empire of trade and usury
Economic and financial power translates into military power. The Europeans didn’t finance their conquests with taxes but with the profits from their colonial enterprises. No one likes to pay taxes, but everyone loves a profit. The scheme thus became an unprecedented success. Venture capitalists paid for the first ships, hoping to find new trade routes and riches. And they found them. The Europeans reinvested their profits, so their capital grew, and their financial and military strength increased.
After the bourgeoisie had taken control of the British government during the Glorious Revolution, the British state became a venture of the propertied class, like the Dutch Republic already was. The Dutch Republic, run by merchants, was the most successful and wealthiest nation at the time. The British imported knowledge of Dutch governance by appointing a Dutch governor as their king. In the following centuries, Great Britain became the world’s largest empire.
The British bourgeoisie benefited from a functioning state and was willing to pay for it. The storyline is that taxation became legitimate as it had the consent of the taxed. The British bourgeoisie didn’t like to pay for corruption or ineptitude, so the state’s performance improved.3 With its secured and enlarged tax base, the clamp down on corruption and ineptitude, the invention of modern banking, including a central bank, trust in British financial markets improved, and Great Britain could borrow more at lower interest rates.
It helped Great Britain to defeat France, a country with twice as much wealth and twice as large a population. In France, the wealthy didn’t pay taxes, and the government was always short of funding. France defaulted on its debts several times. The French government was inept and corrupt, which made lenders unwilling to lend to it. The British economic successes, thus having a large market, low interest rates, and high wages, helped to ignite the Industrial Revolution.
During the Napoleonic age, several European countries modernised their governments into modern bureaucracies, with career paths based on qualifications and merit. The British later also modernised their administration, aligning it more with the rational principles of government that other European countries had adopted after the French Revolution.4 The benefits of the division of labour imply it is better to let bureaucrats run bureaucracies and businesspeople run businesses. You don’t let government bureaucrats run a business, nor do you allow your businesspeople to run the government.
The United States followed a different path. When the Founding Fathers set up their new state based on the modern principles of their time, they were ahead of Europe. They introduced regular elections for the president and parliament and a separation of powers between the administration, parliament and the judiciary, thus creating checks and balances to prevent dictatorship or mob rule. The US also became the first democracy. All free men had received the right to vote by 1820.4 Several European countries later followed suit.
The US administration, however, didn’t become a modern professional bureaucracy at first, and the US government remained plagued by corruption, cronyism, and the presence of unqualified individuals. Politicians gave their supporters government offices when they won the election.4 In 1881, a disgruntled man who had campaigned for US President Garfield and sought a diplomatic job as compensation shot the president. Appointing people for political reasons had become unthinkable in most of Western Europe. Modernisation efforts in the US began in the 1880s, took decades, and never fully succeeded. Political appointments are now making a comeback.
The founding fathers had set up the United States as an oligarchic republic run by the propertied classes, similar to Great Britain and the Dutch Republic. Rather than leaning on a clean government like the British elites, the American elites learned to employ corruption, for instance, via campaign financing, bribing judges, and funding think tanks that advise the US government. After World War II, the United States emerged as a superpower, and the gold-backed US dollar became the currency used in international trade. To finance its military, the US began to run deficits in the 1960s and ended the exchangeability of the US dollar for gold in 1971. The US dollar then became the de facto reserve currency, most notably because oil-exporting countries continued to accept the US dollar.
The US dollar’s reserve status allowed the US elites to employ the productive capacity of the rest of the world for their empire. Foreign countries delivered goods and labour in exchange for US dollars, which the United States printed out of thin air. The US financial elites in institutions like the World Bank and the IMF pushed developing countries into US dollar debts, which made them depend on exports to serve the US empire. As a result, the domestic economy of the United States began to suffer from the Dutch disease. The Dutch natural gas exports created a demand for the guilder, which drove up the Dutch currency and made Dutch industries uncompetitive in the 1970s.
The Dutch remedied the issue in the 1980s by making a collective national agreement between the government, employers, and unions to keep wage increases below those of its competitors for several years. Demand for the US dollar, however, increased, not because of exports, but because of foreign nations being dependent on it, pushing up its value and eroding the competitiveness of American manufacturing. And the US didn’t need to correct that issue, because of the US dollar’s reserve status. The US dollar has become an international store of value, and so has US government debt. There was even pressure to go into debt, to satisfy the global demand for US dollars. As a result, deficits have escalated further, and the American economy depends on controlling the world’s financial markets. The American empire is now the Evil Empire of Trade and Usury, the Babylon of our time. However, the end of an empire doesn’t always turn things for the better.
Latest revision: 7 August 2025
Featured image: cover of The Miracle Island Barataria
1. Het wondereiland Barataria. Silvio Gesell (1922). 2. 1 in 5 business leaders may have psychopathic tendencies—here’s why, according to a psychology professor. Tomas Chamorro-Premuzic (2019). CNBC. 3. The Origins of Political Order: From Prehuman Times to the French Revolution. Francis Fukuyama (2011). 4. Political Order And Political Decay. Francis Fukuyama (2015).
The previous episode about money discussed some imaginary trades between you, a hatter, a lawyer, a barber and a fisherman. It is shown that if people promise to pay this might suffice for payment. So if the fisherman promises you to pay next week for the hat you just made, you could say to the lawyer that you expect the fisherman to pay in a week, and ask her if you can pay in a week too. The lawyer could then ask the same of the barber and the barber could ask the same of the fisherman. If all these debts cancel out then no cash is needed.
In most cases, debts cannot be cancelled out so easily. A hat may cost € 50, legal advice € 60, a hairdo € 30, and the fish € 20. If you are the hatter, you could lend € 10 to the barber and the lawyer could lend € 20 to the fisherman. Perhaps the lawyer doesn’t trust the fisherman because he smells fishy. But if the lawyer trusts the barber and the barber trusts the fisherman then the lawyer could lend € 20 to the barber and the barber could lend € 20 to the fisherman.
That could become complicated quite easily. And this is where banks come in. Banks can lend money because they know the financial situation of their customers. The fisherman can borrow money from his bank to make payments because the bank knows that he has an unstable but good income and a vessel that can be sold for cash if needed.
If the fisherman borrows money to pay for the hat you made, this money ends up in your account. You can use it to pay the lawyer. And so the fisherman’s debt becomes the lawyer’s money until she uses it to pay the barber. People that have a deposit lend money to the bank and the bank is lending this money to those who have a loan, in this case, the fisherman. Depositors trust the bank even though they do not know the people the bank is lending money to.
Most people think of money as coins and banknotes but more than 90% of the money just exists as bookkeeping entries in banks. When a fisherman borrows money from his bank, he can spend it on a hat. This means that the bank creates money and that this money is debt. Most of our money is debt so the value of money depends on the belief that debtors pay back their debts. This seems scary and it keeps quite a few people awake at night.
Some people argue that debts and banking are frauds because they are based on a belief. But banks and debts help to boost trade and production by creating money that doesn’t exist to start businesses that don’t yet exist to make products which will be bought by the people those businesses will hire with this newly created money. Banking and debts are the basis of the capitalist economy.
Banking as bookkeeping
Banking is more or less just bookkeeping and balance sheets. Balance sheets can be used to explain the magic trick banks do, which is creating money. Balance sheets are simple. There are no intimidating formulas, only additions and subtractions. The important thing to remember with balance sheets is that the total of the amounts on the left side must always equal those on the right side.
On the left is the value of your stuff and your money. On the right side is the value of your debts. Your net worth is what remains when you sell all your stuff and pay off your debts. It is on the right side too in order to make it equal to the left side. Your net worth can be a negative value. If that is the case, you might be bankrupt because you can’t repay your debts by selling your assets. The left side is named debit and the right side is called credit. Your balance sheet might look like this:
debit
credit
house
€ 100,000
mortgage
€ 80,000
other stuff
€ 50,000
other loans
€ 30,000
cash, bank deposits
€ 20,000
your net worth
€ 60,000
total
€ 170,000
total
€ 170,000
When you buy a car, you own more stuff, but also another loan or fewer bank deposits as you have to pay for the car. This is because debit always equals credit. When you drive the car, it goes down in value, as does your net worth, because debit always equals credit. If your salary comes in, your bank deposits as well as your net worth rise because debit always equals credit. If you pay down a loan, the amount in your bank account, as well as the amount of your loan, goes down because debit always equals credit. If debit doesn’t equal credit then you have made a calculation error.
Also for a bank, the total of the amounts on the left side must always equal those on the right side, so that debit always equals credit. Your debt is on the debit side of the bank’s balance sheet. You have borrowed this money from your bank. The bank owns this loan. Your bank deposits are on the credit side of the bank’s balance sheet. The loans of the bank are paid for by deposits. Banks lend money to each other. This may happen when you make a payment to someone who has a bank account at another bank. Your bank may borrow this money from the other bank until another payment comes the other way. The balance sheet of a bank may look like this:
debit
credit
mortgages and loans
€ 70,000,000
deposits
€ 60,000,000
loans to other banks
€ 10,000,000
deposits from other banks
€ 20,000,000
cash, central bank deposits
€ 10,000,000
the bank’s net worth
€ 10,000,000
total
€ 90,000,000
total
€ 90,000,000
How banks create money
Banks create money. How do they do that? It is easy if you understand balance sheets. Assume that you, the hatter, the lawyer, the barber, and the fisherman all have € 10 in cash. Together you decide to start a bank. You all bring in the € 10 you own so that you all have a deposit of € 10 and the bank has € 40 in cash. The bank allows everyone to withdraw deposits in cash. This is no problem as long as the total of deposits equals the total amount of cash. After everyone has put in the deposit, the bank’s balance sheet looks as follows:
debit
credit
cash
€ 40
your deposit
€ 10
deposit lawyer
€ 10
deposit barber
€ 10
deposit fisherman
€ 10
total
€ 40
total
€ 40
First, there was only € 40 in cash. Now there are € 40 in bank deposits too. You might think that the bank created money. Only, that isn’t true because the depositors can’t spend the cash unless they take out their deposits. In other words, the depositors don’t have more money at their disposal than before. If you look at the total, there is still € 40. This is bookkeeping. You have to write down the total twice as debit must equal credit.
But now things are going to get a bit wild. The fisherman comes to you and he wants to buy a hat. The hat costs € 50 but the fisherman has only € 10 in his account. To make the sale possible, the bank is going to do its magic. The fisherman calls the bank and asks if he can borrow some money. The bank grants him a loan of € 40 and puts the money in his deposit account so that he can spend it. And look:
debit
credit
cash
€ 40
your deposit
€ 10
loan fisherman
€ 40
deposit lawyer
€ 10
deposit barber
€ 10
deposit fisherman
€ 50
total
€ 80
total
€ 80
Who says that miracles can’t happen? The deposits miraculously increased from € 40 to € 80 so € 40 is created from thin air. There is still only € 40 in cash but the fisherman’s debt created new money. This is how banks create money. And that is only because bank deposits are money. This is all there is to it. So much for the mystery. The fisherman then pays € 50 for the hat. And so it becomes your money:
debit
credit
cash
€ 40
your deposit
€ 60
loan fisherman
€ 40
deposit lawyer
€ 10
deposit barber
€ 10
deposit fisherman
€ 0
total
€ 80
total
€ 80
And now comes the dreadful part that keeps some people fretting. Everyone can take out his or her deposits in cash. There are € 80 in deposits and only € 40 in cash. If you go to the bank and demand your € 60 in cash, the bank would go bankrupt, even when the fisherman pays off his loan the next day. You could bankrupt the bank by buying € 50 in fish with cash. If you go to the bank to get € 50 in cash it would not be there so the bank would go bankrupt before the fisherman can pay off his loan with the same cash.
A bank could get into trouble in this way even when debtors repay their debts. Clever minds already figured out a solution. Central banks can print money too. If the European Central Bank (ECB) prints € 20 on a piece of paper and lends this money to the bank, there would be enough cash to pay out your deposit. Banning the use of cash and only using bank deposits for payments would be another option. So, after the ECB deposited € 20 in cash, the bank’s balance sheet might look like this:
debit
credit
cash
€ 60
your deposit
€ 60
loan fisherman
€ 40
deposit lawyer
€ 10
deposit barber
€ 10
deposit fisherman
€ 0
deposit ECB
€ 20
total
€ 100
total
€ 100
After you pay the fisherman, he can pay off his loan, and the bank will have enough cash to pay out all deposits. The bank can repay the central bank and everything is fine and dandy again. In this case the bank could not meet the demand for cash but the value of cash and loans wasn’t smaller than the deposits (the bank’s debt). After the fisherman pays back his loan and the bank pays back the ECB, the bank’s balance sheet might look like this:
debit
credit
cash
€ 40
your deposit
€ 10
loan fisherman
€ 0
deposit lawyer
€ 10
deposit barber
€ 10
deposit fisherman
€ 10
deposit ECB
€ 0
total
€ 40
total
€ 40
If banks can’t create money, trade would be difficult. If the hat is € 50, the legal advice € 60, the hairdo € 30, and the fish € 20, and you, the lawyer, the barber and the fisherman all have only € 10, nothing can be bought or sold. If the bank lends € 40 to the fisherman, he can buy a hat from you, you can buy legal advice from the lawyer, the lawyer can buy a hairdo and the barber can buy fish. Debt is the basis of the capitalist economy. Nearly all money is debt, and without debt, the economy would come to a standstill.
How much money can banks create?
The amount of money a bank can create is limited by the bank’s capital, which is the bank’s net worth. Regulations stipulate that banks should have a minimum amount of capital. This is the capital requirement. If the capital requirement is 10%, and the bank’s capital is € 10,000,000, it can lend € 100,000,000, provided that there are enough deposits. If the bank makes a loan, a new deposit is created. If the deposit leaves the bank, the bank must borrow it back from another bank or cut back its lending. That is because debit must always equal credit.
debit
credit
mortgages and loans
€ 70,000,000
deposits
€ 60,000,000
loans to other banks
€ 10,000,000
deposits from other banks
€ 20,000,000
cash, central bank deposits
€ 10,000,000
the bank’s net worth
€ 10,000,000
total
€ 90,000,000
total
€ 90,000,000
When a deposit leaves the bank, it ends up at another bank. The other bank can use it for lending, provided that it has sufficient capital. There may be a reserve requirement, which is a minimum of cash and central bank deposits the bank must hold. If the reserve requirement is 10%, the bank can lend out as much as ten times the amount of cash and central bank reserves it has available. In the past, reserve requirements were important as people often used cash and could go to the bank to demand their deposits in cash. For that reason banks needed to hold a certain amount of cash.
Featured image: Deutsche Bank building CC BY-SA 4.0. Raimond Spekking. Wikimedia Commons. Public Domain.
Money was invented because trade would be difficult without it. For example, if you are a hatter in need of legal advice, then without money, you have to find a lawyer who craves a hat. That is unlikely to happen. Maybe there is a fisherman dreaming of a hat, but he can’t give you legal advice. Maybe there is a lawyer in need of a hairdo instead of a hat. With money, all these problems disappear like magic. You can buy the services of the lawyer so that she can go to the barber. After that, the barber can buy some fish so that the fisherman can buy a hat from you.
Despite these mind-blowing advantages humans didn’t need money for a long time because they lived in small bands and villages where everyone depended on each other and everyone helped each other. This meant, for example, that when a fisherman needed a hat, you would make a hat for him, and if you needed anything, someone else would provide it to you. You did someone a favour so that he or she was obliged to do something back. Villagers produced most of what they needed themselves. Trade with the outside world was limited and was done with barter.
Uses of money
Later cities, kingdoms and empires emerged. People living in cities, kingdoms and empires didn’t know each other so it became difficult to track whether or not everyone was contributing. Favours and obligations didn’t suffice. They were replaced by a formal system for making payments and tracking contributions and obligations. Commerce and tax collection needed a means of payment as well as administration. It is therefore not a coincidence that writing and money were invented around the same time in the same area. The earliest writings were bookkeeping entries. Money has the following uses:
buying and selling stuff (payment) so money is a medium of exchange
saying how much something is worth, so money is a unit of account
keeping track of contributions and obligations (saving and borrowing) so money is a store of value.
Nickelodeon character CatDog
Money being a medium of exchange as well as a store of value is like your pet being a cat as well as a dog. The result is not really a success. The parts of the pet may often quarrel, for example, because the dog part wants to play while the cat part wants to sleep. If someone keeps some money for a rainy day and does not spend it, others cannot use this money for buying stuff. And this can be a problem. A simple example can explain this.
Imagine that everyone decides to save all his or her money. Nothing would be bought or sold anymore. All businesses would go bankrupt and everybody would be unemployed. All the money that has been saved would buy nothing because there isn’t anything to buy anymore. This is a total economic collapse.
In reality, it doesn’t get that bad as people always spend on basic necessities like tablets and mobile phones, and perhaps food. When people only spend money on necessities there is an economic depression, which is not as bad as a total economic collapse but still very bad. Saving can make you poorer, but only when there are too many savings already. Savings are used to invest in businesses and hire workers to make products and services. Only if there are more savings than investments, does money remain unused.
The value of money
Money has no value when there isn’t any stuff to buy or when there aren’t any other people to trade with. Imagine that you get the offer to be dropped alone on a remote and uninhabited island in the Pacific with 10 million euros. Probably you would decline the deal, even if you can keep your mobile phone. It is other people and stuff that give money its value. But how? The answer is remarkably simple. The value of money is just a belief.
People are willing to work for money and sell their stuff for money. And because others do this, you do the same. For example, you may think that euro notes have an appalling design as well as an unpleasant odour, but nevertheless, you desire to own them because other people want them too. The euro’s value is based on the belief that other people accept euros for payment.
This is just a belief as the following example demonstrates. Suppose that you wake up one day to hear on the news that the European Union has been dissolved overnight. Suddenly you may have second thoughts about your precious stockpile of foul-smelling unstylishly decorated euro banknotes.
You may ask yourself in distress whether or not your precious bank notes still have any value. What is the value of the euro without the European Union? You may find yourself hurrying to the nearest phone shop in an effort to exchange this pile of banknotes for the latest model mobile phone.
And to prove this point even further, suppose that the phone shop gladly accepts your euros. Suddenly they become desirable again and you may start to have second thoughts about that latest model you are about to buy. It may not remain hip for much longer, so you may change your mind again and prefer to keep your precious euros because there may be a newer model next month. So, because the shop wants your euros, you wants them too.
Types of money
At first, money was an item that people needed or desired. Grain was one of the earliest forms of money. Everybody needed food so it was easy to make people believe that others accept grain for payment. In prison camps during World War II cigarettes became money because they were in high demand. Even non-smokers accepted them because they knew that other people desired them very badly. For that reason, cocaine can be money too.
Wares like grain, cigarettes and cocaine have disadvantages. They degrade over time so they aren’t a very good store of value. This makes them a great medium of exchange because people won’t save them. An example can demonstrate this. Imagine that apples are money and you want to buy a house. A house costs 120,000 apples but your monthly salary is just 2,500 apples of which you can save 1,000. It takes 10 years of saving to buy a house. Soon you will discover that apples rot and that you will never be able to buy a house. Then you will spend all your apples right away.
Saving is difficult with apples. This is where gold and silver come in. Gold and silver do have not much use, but humans were always attracted to shiny stuff. Gold is rare so a small amount of gold can have a lot of value because some people feel a strong desire for shiny stuff. Gold and silver coins can be made of different sizes and purity so that they are suitable for payment and can be used as a unit of account.
More importantly, gold and silver do not deteriorate in quality like apples, grain or cigarettes. They do not even rust after 1,000 years. This makes gold and silver an excellent store of value. But this should make us suspicious. A perfect cat makes a lousy dog so a perfect store of value can fail the test for being a good medium of exchange. People can store gold and silver so that there is less money available for buying and selling stuff. And this can cause an economic depression as we have seen.
Governments create money too, for example by printing “10 euro” on a piece of paper. Governments require by law that this money should be used for payments and taxes. This makes people believe that others accept this money too. Government money is called fiat currency or simply currency. The authority of a government is limited to the area it controls so in the past government currencies had little value outside the country itself unless this money consisted of coins containing gold or silver.
In fact, another reason why gold and silver are attractive as money is that the value of gold and silver does not depend on the authority of a government. This made gold and silver internationally accepted as money. In the 19th century, most government currencies could be exchanged for a fixed amount of gold. This is the gold standard. The gold standard boosted trade because gold was internationally accepted as money.
Most money is debt
Debts can have value and so debts can be money too. This may seem strange or even outrageous, but money is just a belief. For example, money is the belief that you can exchange a hat for money and then exchange this money for legal advice. Hence, if you believe that the debtor is going to pay, you can accept his or her promise to pay as payment. And if others believe this too, you can use this promise to pay someone else.
So if the fisherman promises you to pay next week for the hat you just made, you could say to the lawyer that you expect the fisherman to pay in a week, and ask her if you can pay in a week too. The lawyer could then ask the same of the barber and the barber could ask the same of the fisherman. If all debts cancel out then there is no need for cash. Most of the money we currently use is debt. In most cases, debts don’t cancel out and there are many more people involved so it would be complicated to keep track of all debts and savings. That is where banks come in.
Featured image: Close up of coin hoard CC BY-SA 2.0. Portable Antiquities Scheme from London, England (2010). Wikimedia Commons.
Other images: Nickelodeon character CatDog, Sméagol character from The Lord of the Rings [copyright info]
The Plan For The Future 