Category: economics

The Dark Side

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Trade and finance

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).

Deutsche Bank Towers in Frankfurt am Main

What Is the Use of banks?

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Turning debt into money

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.

Coin hoard

What is money?

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Why do we have money?

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.
catdog
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]

A tenner on the street

Money for Nothing

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Cheap promises

‘Stop whining. Everyone should be rich. Vote for the Tegenpartij (Opposition Party), together for ourselves.’ It was the motto of the fictional Opposition Party, run by two shady characters of the second-car-saleman type, Jacobse and Van Es. The creators of the fiction, Van Kooten and De Bie, intended to mock populist politicians and their promises. An opinion poll revealed that the party could have won a few seats in parliament in 1981, had it not been a prank. But why can’t everyone be rich? Perhaps it is because poor people don’t have enough money. It can’t be that simple, or can it? Some think it is. So, why not hand out money for free? It is a scheme known as Universal Basic Income (UBI).

Perhaps machines and computers will soon do all the work. And if we lose our economic purpose, how can we remain alive? The wealthy, who own most capital, have no reason to let us live. We must distribute that money more fairly, the proponents of a UBI argue, by taxing the rich to pay the poor. Until now, these schemes have never worked as intended, with the wealthy evading taxes and the middle class paying for social benefits. Yet, that can change once we live in a global society where tax evasion is impossible. Some countries have a dole for those who don’t work. And if there are no jobs, everyone may have to go on the dole. That could end the relationship between humans and work that has existed since time immemorial. And so, it is a profoundly disturbing idea.

Proponents of UBI argue that handing out money can improve people’s lives. Research has shown that not having to worry about making ends meet greatly improves the quality of your life. However, many working poor struggle to make ends meet, and if you erode the benefits of working by handing out money to the lazy, you demoralise them from doing useful work. Without an incentive, many, if not most, wouldn’t contribute to society and definitely not take up unattractive jobs. On top of that, many people can’t make ends meet because of lifestyles that people in wealthy countries consider normal, but that are, in historical terms, outliers and, above all, untenable. So, ideally, we work less, but also have less, while those who do useful work are rewarded for it. We somehow have to figure out an economic system that produces enough, but not too much.

You may think that a UBI is a crazy scheme, most notably, the idea that you don’t have to work for a living. Yet, what we are doing now is also insane. We are engaged in a rat race to transform energy and resources into waste and pollution to make the rich richer and create technologies that will terminate humankind. We would be better off if most people in advanced economies stopped doing their jobs. And we are handing out money for free to the rich. At present, we have helicopter money. Central banks hand out money to the wealthiest in the hope that it will eventually trickle down to the working class and the poor. And that is necessary because we pay interest to the rich. So, if governments stop going into debt and central banks stop printing money, the usury scheme collapses.

Game of Monopoly

To illustrate the point, we can look at the game of Monopoly. The game is a model of capitalism, a simplification highlighting specific aspects of the system, not reality itself, but it highlights why capitalism fails. If you have played the game more than once, you may have noticed it usually goes like this. Initially, players purchase streets and generate capital by constructing houses and hotels. You can get rich by making the right investment choices. You also need luck and to be at the right place at the right moment. The game ends when nearly all players are bankrupt, except one. At that point, there are more houses and hotels than players, so a lot of wealth, but few can afford it. The merit of the model is that it explains why billionaires get richer while many others can’t afford the rent.

Monopoly comes with a UBI. Every time you finish a round, you receive a fixed sum. It keeps the game going. Otherwise, players would soon run out of cash. If the game ends, the players can wipe out all the houses and hotels and start anew. In the real world, it would be akin to collapsing the economy, which is a highly inefficient way of reducing wealth inequality. The alternative is to tax the rich and distribute that money to the poor. Capital income makes wealth accumulate in the hands of a few. Without it, there is less need for redistributing income. Had there been no houses and hotels, the game could continue indefinitely, even without handing out money every round. Returns on capital are the source of the trouble, but without capital, there would be no homes.

Likely, the game could continue without losers if you could build only one house on every street. That would be enough, as you wouldn’t have to sleep rough. Having just enough capital helps to alleviate the issue. Most billionaires today have become rich by providing services we do not need, not by farming or building homes. If the streets are evenly divided, you do not need to hand out money to keep the game going. In the real world, some people save their money, while others waste it, and some are lucky while others are not. Economic forces must run their course to build capital. Yet, you need mechanisms to balance it out. And interest on capital is the dole for the rich. The justification for it was that capital must be allowed to grow. Only, we now have too much capital.

Bullshit jobs

For most of history, most people worked an average of a few hours per day, but they were dirt poor. The Industrial Revolution changed that. Factory owners wanted labourers to work long hours in regular schedules to increase production. That is still how the economy operates today, even though we now produce far more than we need with only a fraction of the workforce, so we must entertain the remainder by wasting energy and resources on non-essential activities. In ‘advanced’ economies, less than a third of the workforce may do things that we need. The remaining jobs are pointless bullshit jobs. These occupations range from trading securities to taking orders at a fast-food restaurant. Once resources are gone and the Earth has become a wasteland, these jobs will be gone.

Working is doing something useful for others or society. While performing our jobs, we consume energy and resources. Therefore, if our jobs aren’t essential, they aren’t work but entertainment. We drive our cars to heated or air-conditioned offices. We work hard, so we believe we deserve a holiday and consume energy and resources for relaxation. If we eliminate all the pointless jobs, we can divide the remaining work, relax more, and thus avoid wasting energy and resources on holidays. The anthropologist David Graeber estimated that at least one-third of all jobs are pointless.1 It is much more than that.

So, which jobs can we do without? Graeber mentions a receptionist at a publisher in the Netherlands. She had nothing to do except for taking up an occasional telephone call. Another employee could have done that alongside other tasks. But without a receptionist, no one would take the publisher seriously. And so, the publisher needed a receptionist. It made economic sense. Still, we can do without the publisher and over 99.99% of the books ever published. Graeber has vastly underestimated the inefficiency of the modern economy in terms of the energy and resources it consumes relative to our needs.

In our economic system, a job has economic value when someone is willing to pay for it. I could hire you to dress as a rabbit and hop on the street. Perhaps that brings a few smiles to a few faces, so who is to tell this job is pointless? Okay, the cost of making the rabbit suit could have saved a few children from starvation, but that has less economic value because these children had no money. And that is precisely the problem. Think of consultants, managers, salespeople, lawyers, and financial advisors.

They don’t produce anything we can eat or use to keep us warm. A small percentage of what they waste on frivolous consumption could feed those who still go hungry. These highly peculiar views stem from a belief that money is the supreme measure of value and that we must engage in a rat race to produce and consume as many non-essential items as possible to prevent businesses from becoming unprofitable, as that would lead to economic collapse. And so, they keep telling us, like Jacobse and Van Es, that if we work harder and waste more energy and resources on senseless production and consumption, allowing capital owners to make more money, everyone will end up rich.

Making it work

Doing a job is about making yourself valuable to others, not about doing what you like. Essential jobs are often unattractive and uninspiring. In wealthy countries, most notably those with social benefits, immigrants do most of the unattractive jobs, also because the pay is low. These include vital jobs, such as harvesting crops. Meanwhile, the indigenous population went on to create value by performing redundant activities in the bullshit economy. The production of essentials, such as commodity goods like farm products, suffers from intense competition, so that jobs in these sectors are often hard work for low wages. Breaking up markets and producing for local consumption could change that. If one thing can help to make that happen, it is high transport costs.

Since time immemorial, humans have lived in groups. Most contributed to the group. That was how they survived. If we plan to survive, it must be rewarding to do essential jobs like harvesting crops and building homes. In ‘advanced’ economies, most people entertain themselves in the bullshit economy, transforming energy and resources into garbage and pollution, while not producing anything we need. That is worse than being on the dole if you look at the bigger picture and make the survival of humankind our primary directive. And so, we need to take the redundant labour off the market. It may well be that the economy reorganises itself, so there may be more people to do tasks like caring for the elderly, education, cleaning up the planet, and policing. Yet it is also likely that many remain on welfare. At the very least, the universal basic income should include food, clean drinking water, shelter and basic medical assistance.

An alternative to a UBI is an income guarantee. Why hand out money to people who have enough? And there should be an incentive to work. The income guarantee can include a work requirement, such as doing community service. Existing welfare schemes often make it financially unattractive to take on a low-paying job. A simple example can explain what an income guarantee scheme might look like. Assume there is an income guarantee of €800 per month and a 50% income tax.

gross incometaxnet income
€ 0+ € 800€ 800
€ 1000+ € 300€ 1300
€ 2000– € 200€ 1800
€ 3000– € 700€ 2300
€ 5000– € 1700€ 3300

The income guarantee gets settled with the income tax, so you receive assistance when your income is low. You may not receive money, but you may receive food or shelter. If your gross income is €2,000, you pay €200 in taxes, and your net income is €1,800. There is an incentive to work as you gain financially from doing a job. The income guarantee can replace existing welfare schemes, reducing red tape.

Welfare schemes require funding. To finance the scheme, you need more people making €3,000 or more than people making €1,000 or less. And so, the income guarantee can’t be fixed, and it may not be sufficient to live off if not all essential job positions are fulfilled. Even then, an income guarantee can improve workers’ bargaining position, as it can allow workers to work fewer hours, removing labour from the market, resulting in higher pay that attracts more workers, most notably if the guarantee is insufficient to live on.

Denmark has an income guarantee, combined with a duty to seek employment. It helps to make the Danish labour market flexible. Corporations can adapt their workforce to market requirements. Employment security, education and the income guarantee compensate for the lack of job security.2 Denmark is, in many ways, an ideal society, with a functional social contract and a competent government. That doesn’t come out of nowhere. Such a society requires particular cultural values, such as a sense of duty, that make people seek employment, and if necessary, education to fit into a new job.

This scheme is far from ideal. It will bring new problems, some of which we may not be able to fix. Yet the way the economy is organised at present is suicidal. There is no alternative. We must find something better. Faced with the high efficiency of the production of essentials and the vast overproduction and marketing of non-essentials, and the impossibility of directing the superfluous workforce to produce essentials at short notice, there appears to be no choice but to take a daring step and seriously consider handing out essentials for free, which we already do, so that the change is likely less than we imagine. From there, we may start building the economy of the future.

Latest revision: 5 May 2026

Other images: Monopoly game.

1. Bullshit Jobs. David Graeber (2018). Simon & Schuster.
2. Danish Employment Policy. Jan Hendeliowitz. Employment Region Copenhagen & Zealand, The Danish National Labour Market Authority (2008). https://www.oecd.org/employment/leed/40575308.pdf

Illustration for the first edition of Utopia

Welcome to Utopia

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Utopian dreams

A few centuries ago, nearly everyone lived in abject poverty. Most people had barely enough to survive. In the Middle Ages, 30% of the children died, often of malnutrition or diseases. And so, Thomas Hobbes wrote in 1651 that man’s life was poor, nasty, brutish, and short. It has been that way since time immemorial. Around 1800, Thomas Malthus concluded that humans live in a permanent state of misery. Once we have more food and resources, more children will survive, so that we will always be on the brink of starvation. At the time, only one billion humans were roaming the Earth, searching for a meal.

Two centuries later, a miracle had occurred, and it was unexpected if you had lived in 1800 or before. Today, more than eight billion people live on this planet, and less than one billion live on the brink of starvation. The life expectancy in the poorest countries exceeds that of the Netherlands in 1750, the wealthiest nation before the Industrial Revolution. At first glance, it looks like Paradise. Available food and resources have increased faster than the population. Capitalism and fossil fuels enabled this growth. We now use more resources than the planet can sustainably provide, so an apocalypse is in the air.

In 1516, Thomas More wrote a novel about a fictional island, Utopia. Life in Utopia was good. The Utopians had a six-hour workday and had enough because everyone took only what they needed. Utopia means ‘nowhere,’ but the name resembles eutopia, which means ‘a good place.’ More may have intended the pun. There is more than enough for all of us. So, why can’t we all work a few hours per day, live peaceful lives and have enough? A well-functioning society requires a set of values and a culture to support it.

Utopian dreams aren’t new. According to the Bible, humankind once lived in the Garden of Eden, where people lived simple lives and were happy with what nature provided. Jesus said, ‘Look at the birds of the air; they do not sow or reap or store away in barns. God feeds them.’ There have since then been utopian dreams of peace and sharing. Most utopian dreamers think of a better world while leaving the hard work to others. In reality, utopian societies are not perfect and are oppressive to those who don’t fit in. Usually, their ideologues define the ideal human as hard-working and public-spirited.

Third ways

There have been several attempts to arrive at a synthesis of capitalism and socialism, often called a third way. The challenge of socialism, 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, that debate has narrowed down to a struggle between communism and capitalism, or between individual freedom and enforced collectivism. After the collapse of the Soviet Union, the feeling in the West is that capitalism is superior and that there is no alternative.

The Soviets have tried to bring communism into practice. They replaced markets with state planning and repression. Due to the forced collectivisation of farms, millions died of starvation. Millions more ended up in prison labour camps. The end of communism led many people to believe that a better future lay ahead. But many of the economic problems we face today stem from faith in capitalism and the idea that governments can manage its drawbacks. And so, the question remains: is a third way possible? The Chinese have kept innovating and remained determined to make socialism work. It did so by making the Chinese economy more capitalist. However, the state still runs much of it.

The Russians lost faith in the fairy tale of socialism as central planning produced poor outcomes. Still, the Chinese economy has baffled the proponents of the capitalist myth. 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. The Chinese have demonstrated that you can submit the profit motive to a society’s goals and place large corporations in sovereign wealth funds. But competition still determines the outcome. We are in a rat race that will probably not end well.

The Chinese political economy is more advanced than Western models in that it subordinates the economy to political goals while promoting prosperity for China’s population. In many fields, China has surpassed the West. So if we were to agree on humanity’s goals, political control works better than pure capitalism. Chinese culture contributed to China’s development. Several Asian nations with similar cultures have also successfully modernised their economies. Modernisation is also a cultural shift from reliance on families and communities to markets and states.

The failures of capitalism and socialism come from the fact that both are models of reality, thus simplifications, and that the oversights in both models come with disastrous consequences. We are religious animals who want to believe in fairy tales like capitalism and socialism. The proponents of these systems blame their failures on execution rather than on the systems themselves. To clarify the discussion and address confusion about terminology, it may be helpful to provide definitions of economic systems. Their differences centre around ownership of resources, capital, and labour.


resourcescapitallabour
communismstatestatestate
socialismstatepublicprivate
third way / mixedvariesvariesprivate
capitalismvariesprivateprivate

Under communism, the state owns all there is, including your labour, so you can’t even decide on the job you take. Under socialism, you can choose your occupation, but capital and natural resources are public, thus owned by workers or the state. In mixed economies, ownership of natural resources and capital varies. You may own the ground, but if there is oil underneath, the oil may belong to the state. There may be state-operated corporations, such as railways, alongside private corporations. Under capitalism, everything is private. There may be public services, but there are no public corporations. Few countries give their resources away for free. Governments want a piece of the action.

One crucial oversight is culture. There were substantial differences in living standards in the Soviet Bloc. 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 a single country and under the same system. Likewise, capitalism also promoted varying results. Latin America remained poor despite having mostly right-wing regimes. Cultures change, and an advantage can turn into a disadvantage. Success breeds complacency, and to stay competitive, you have to regularly ‘reinvent’ yourself.

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, discipline, and ingenuity, as well as China’s long-standing tradition of modern bureaucratic government and Confucian ethics, which enable the government to work in the public interest and the people to respect authority. Chinese culture thus helped them to achieve this. China’s economic success resembles that of neighbouring countries with similar cultures, such as Japan and South Korea. The Japanese and South Korean economic successes also involved state planning and the state organising industries.

Free economy

There are other ways of organising the economy besides communism and socialism. These are community economics and religious economics, so economies founded on a moral system. Economic thinking centres around the division of tasks between the market and the state. There is little room for moral systems and communities. Religion can make people pursue other goals in life than maximising economic utility, while communities can produce most of the essentials, as they did in the past. Barataria had an economy with private enterprise and home ownership, but without capitalists, bankers, or merchants. The Baratarians were a community sharing a religion.

Silvio Gesell believed in economic self-interest as a natural and healthy motive for satisfying our needs through productive activity. He aimed for free and fair competition with equal opportunities 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. Henry George believed that society gives land its value through public services. George thought that a land tax would benefit the overall economy and could replace other taxes.

After Argentina experienced an economic depression in the 1890s, Gesell found that returns sometimes failed to meet investors’ minimum requirements. It caused investors to put their cash in their pockets, disrupting money flows. It regularly caused economic hardship and unemployment. Gesell proposed a holding fee on currency to keep the money in circulation, as low returns are more attractive than paying the surcharge, which amounts to a negative interest rate. Gesell’s economic system was well known in Germany as the free economy. In Wörgl, the holding fee on money proved a successful recipe to revive the economy during an economic depression.

European Union

European economies are mixtures of capitalism and socialism. Many Brits found the union too socialist and bureaucratic, so they left. The European Union tries to regulate capitalism a bit too much to the taste of many Britons. Overall, Western Europeans live a relatively good life. Well-being is hard to measure, but European societies are among the world’s most agreeable, at least 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 other new technologies. But this political-economic model will probably not survive the competition for much longer.

Europe has a collectivist tradition with Christian and socialist roots, as well as worker and consumer protection laws. Europeans live longer than Americans, partly because the European Union has banned unhealthy foods that are 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 through bribery of politicians. That is also because Europeans have more faith in the common good than Americans do. Like the invisible hand, our imaginary invisible friend, the common good, has a few magical powers of its own.

Immigrants do much of the hard manual labour in Western Europe, often for low wages, so they help many Europeans lead agreeable lives. They frequently live in poor housing. Others may find Western Europeans lazy, as they work 36 hours per week and have five weeks of holidays each year. Europe is losing the competition, or at least that is what the experts think. Still, the lives of people in Western Europe may be the closest to what life should be in Paradise, except that European energy and resource consumption would be unsustainable if everyone lived like that. The demise of the European Dream shows that competition is the reason why we can’t live in Paradise forever.

Nazi Germany

The Nazis produced an economic miracle during the Great Depression. Their success came from deficit spending for rearmament and from restricting trade with the outside world, so government expenditures boosted the German economy without 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 lead to high inflation. Price, wage and rent controls also helped keep inflation in check, but they hurt small farmers. The Nazi economy was a mixture of state planning and capitalism. Germany was rearming and preparing for war, so it was also 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 better than that of fully communist countries. Yugoslavia was more open, and living standards were higher. Eventually, Yugoslavia couldn’t compete with more capitalist economies. The oil crisis of the 1970s magnified the economic problems. Foreign debt soared. Generous welfare spending further contributed to Yugoslavia’s financial woes. The case of Yugoslavia highlights the issues that plague utopian economies.

The country implemented austerity measures, such as rationing fuel use and limiting imports of foreign-made consumer goods. Yugoslavia had been able to feed its people until then, but from the 1970s onwards, the country became a net importer of farm products. Yugoslav citizens could 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. The Yugoslav economy collapsed in the 1980s.

Openness to foreign competition contributed to the demise of the Yugoslav economy. Yugoslav consumer products were inferior to foreign products. To compete, businesses laid off workers. The Yugoslav economic system might have worked if every country had operated its economy like so. Yugoslav products would have sufficed had there been no better alternatives. In that case, mass unemployment wouldn’t have materialised, and Yugoslavia could have managed, perhaps with less generous welfare. Utopian economics can only work when the economy encompasses the entire world.

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 value. Reducing quality brought short-term cost savings, boosted the stock price, and generated management bonuses. That seemed all fine until Boeing’s aeroplanes began dropping from the sky. The largest holders of Airbus stock are European states, allowing the corporation to focus on its long-term goals. The state-owned aeroplane industry is one of the few areas where Europe is still at the top.

Traditional Soviet-style communism yielded subpar economic results, but the Chinese continued to innovate. 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, the Chinese economy integrated into the global economy. It depends on exports, like those of other Asian Tigers such as Japan and South Korea. China’s advantages include a massive market, which enables it to achieve economies of scale, the world’s longest tradition of rationally administered states, and a culture shared with some other East Asian countries that enabled the Chinese to develop quickly.

The ideological vision behind China’s market reforms was 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. The CCP claims it has incorporated a market economy into the Chinese socialist system. The CCP leadership looks at its project through an ideological lens. Proponents of capitalism might argue that China is more capitalist than the West, given its success. Had China failed, the same people would have blamed it on socialism. Others call it state capitalism, as the SOEs that comprise a large share of the economy operate like private-sector firms and retain their profits rather than returning them to the government. On economic organisation, the West can learn from China.

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 leading polluter and carbon dioxide emitter. China’s status as a manufacturer and exporter distorts the picture. By importing from China, other economies appear less polluting. Those who have visited China long and often enough to have an informed picture agree on the following:

  • China is ahead of the West in several crucial fields. Its economy is more efficient. The West, as it operates now, is losing the competition.
  • Cities are clean, and violent crime levels are low. There is intensive surveillance, which we in the West consider intrusive.
  • There is a lot of corruption. Unlike in many other countries, Chinese corruption promotes economic growth by bribing people to get things done.
  • China is a dictatorship, but citizens have options to criticise and influence the government. If you aren’t a troublemaker, you are relatively free.
  • China represses dissenters and has put millions of people in internment camps to re-educate them and turn them into Chinese citizens.

Chinese corporations align with the Communist Party’s societal goals. There is a profit motive, but profit is secondary. The government can provide support through subsidies. In that sense, the Chinese economy looks like that of the Soviet Union. This model achieves acceptable living standards. At present, China outcompetes the United States and Europe in many fields. If our society’s goals are sustainability and happiness, this economic model can help align corporations with public policies.

State control and ownership of businesses, as in China’s, can be a viable way to pursue political goals such as protecting the environment and reducing poverty. Business objectives, such as profit, can become secondary to political goals, provided that corporations receive support when needed. With state ownership, it becomes feasible to ban products or subsidise others without harming or favouring private entrepreneurs. What China has demonstrated is that a politically steered economy can be competitive and achieve acceptable living standards. And so, we should have confidence that a political economy grounded in moral values can achieve acceptable living standards.

Getting to Denmark

In 1997, my wife and I visited a town in Venezuela. The shops there had armed guards. Shopkeepers believed that they needed these security measures. Not surprisingly, I didn’t feel safe there. If you need guns to protect yourself, something is wrong with society. Perhaps criminals had free rein, and you could not trust the police. Starting a business in Venezuela seemed unwise. I have also been to Denmark. The difference is astounding. Venezuela is an extreme case, and so is Denmark. In the 2024 Corruption Perceptions Index, Denmark ranked first, with the lowest level of corruption in the world. Venezuela was at the bottom. Compared to the rest of the world, Denmark is a Paradise.

Poverty, inequality, and the absence of the rule of law go hand in hand. Without a rule of law, you and your property are unsafe, and building a flourishing society becomes impossible. Some societies are more agreeable than others. Economists understand the rule of law as secure property rights, but it is more important that citizens feel safe and can conduct their affairs in peace. High-quality societies don’t come easy. It is tough to have a capable government, the rule of law, and accountability to the citizens simultaneously. One measure the Danes took to preserve their society was limiting migration, but it would be better if all societies were as agreeable as Denmark’s.

That is possible. Denmark became the way it is because of its unique history. The Danes turned from raping and pillaging Vikings into the peaceful nation it is today. Cultures can change dramatically. Danish history includes the Protestant Reformation. The German sociologist Max Weber argued that the Protestant ethic contributed to the rise of modern capitalism. This ethic includes education, hard work, thrift, and moral uprightness. And that affects attitudes towards graft. The ethic was most present in North-West Europe. Formerly Protestant countries are the least corrupt. But every country can achieve the same. Singapore, Uruguay and Japan are also among the least corrupt countries.

So, what is life in a high-trust society? Everyone is a good citizen. The government is clean. No one misuses state benefits. There is no crime. You feel safe on the streets. You can trust the police. The rules apply to everyone equally. A government can’t create a good society. It merely reflects society. A government can’t enforce laws when its citizens don’t believe in and don’t live by them. Denmark is a cohesive society. People feel connected to each other and share the same values. Becoming a global society like Denmark is an unlikely future for humanity, and getting to Denmark is a utopian dream. Unless, of course, unless a miracle happens. Only religion can move mountains.

Latest revision: 6 December 2025

Featured image: Illustration for the first edition of Utopia by Thomas More.

1. Leviathan. Thomas Hobbes (1651).