Fiscal and Monetary Policies

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Economic cycles

Mismatches between supply and demand cause economic cycles. A harvest may fail, and food prices may rise, leaving us with less money to spend on other items. Mismatches can concern the supply and demand of money, capital, labour, raw materials or consumer products. Interest charges also contribute to economic cycles. Interest rates reflect the market for funds. If all markets were perfect, economists argue, supply could adapt to demand instantly, and there would be no economic cycles. Not unlike many others, economists love fairy tales about a Paradise where everything is perfect. And so, they may advise us to make markets perfect, so that an economic Paradise will ensue.

Economic cycles occur because mismatches between supply and demand emerge periodically and eventually resolve. Economists use the term equilibrium in their models to explain the relationship between supply, demand, and price, but these models are simplifications of reality. There is rarely a stable equilibrium, and fluctuations in demand and supply cause changes in prices, inventories, and employment. There are several theories and explanations regarding those mismatches, economic cycles, and their effects. Most notably, money, credit and interest deserve attention.

According to Say’s law, supply creates its own demand because we make goods and services to use ourselves or to acquire other goods and services. It is most applicable to a simple barter economy. When money serves as a medium of exchange, we can postpone our purchases, leaving producers with excess inventory. Money hoarding can be a serious problem as it interrupts the circular flow of money. When money loses value, we are less likely to postpone purchases. It is why central banks aim for a bit of inflation. However, inflation shouldn’t be too high, as that can undermine trust in the currency.

Expectations are another factor. When consumers feel good about the future, they are more willing to spend on big-ticket items. Likewise, when investors expect brighter prospects, they anticipate higher profits, making them more willing to invest. Conversely, when consumers and investors are pessimistic, the opposite happens. And so, expectations can become a self-fulfilling prophecy. Likewise, when people expect a bank to collapse, it may collapse because that expectation triggers a bank run. Policy makers try to instil confidence in the system because a lack of confidence can break it. The reason is that credit means trust, and trust is what keeps the system going.

During good times, businesses and individuals tend to be confident. Credit is often available because businesses’ and individuals’ future income projections serve as the basis for banks to lend money. And so, companies and individuals can borrow more in good times. When the economy slows and their incomes decrease, they may struggle to make their interest payments. Consumers would have more disposable income without debt, since they wouldn’t have to pay interest. Similarly, businesses can go bankrupt even when they are profitable overall because of interest charges. And so, interest charges can exacerbate and prolong the bust.

Leverage contributes to the overall risk in financial markets. Liquid financial markets make it easier to enter and exit positions, leading investors to believe it is safe to operate with leverage. If markets were not fluid, leverage would appear more dangerous, as it would be more difficult to exit a position. For example, if you aren’t sure that you can renew your mortgage after five years, you aren’t going to buy a home. Liquidity enables risk-taking, allowing the overall level of risk in the financial system to increase. That can become apparent during a crisis. People who have to sell their home during a housing crisis may end up selling it at a low price, leaving them with a debt that takes years to repay. Therefore, maintaining a liquid market is crucial for its safety, and limiting leverage further enhances its security.

Bureaucratic interventions

In the wake of the Great Depression and World War II, government and central bank interventions have become standard tools for bureaucrats to manage the capitalist economy. Fiscal policies involve steering the economy through government expenditures. Ideally, it works as follows. When the economy is performing poorly due to sluggish demand, the government increases spending to boost demand. Conversely, when the economy is overheating due to excessive demand, the government reduces spending to curb demand. Likewise, central banks can lower interest rates to promote borrowing and boost demand, or raise interest rates to discourage lending and curb demand. These policies can have the following undesirable consequences:

  • The timing of the measures may be off, so when the measure has been decided upon and is taking effect, the economy may already be on the desired path.
  • Politicians may interfere and press for increased government spending or lower interest rates to boost the economy and get them re-elected.
  • Central bank interventions cause market participants to take more risk because they expect the central bank to intervene.
  • Due to usury, debt levels increase, so once these policies are commonplace, there are no corrections to cleanse the system from its excesses.

By failing to periodically cleanse the financial system of its excesses, either through a debt jubilee or an economic depression, the economy becomes addicted to credit expansion, and the final collapse will be even more severe. As the US dollar is the world’s reserve currency, a collapse in trust in this currency can trigger a global economic apocalypse. Usury is the primary reason for fiscal and monetary policies, because interest on money and debts generates a money shortage, driving a demand for credit. Debtors must repay more than they borrowed, but that extra money doesn’t exist. And so, governments and central banks fill the gap to prevent the usury scheme from collapsing.

Due to usury, it has become a permanent requirement. To prevent a shortage of money or a liquidity crunch from materialising, governments borrow, and central banks print money. The shortage arises when the private sector fails to borrow enough to cover the interest on existing debts. To counter the problem, the government can borrow and spend this money. Central banks can lower interest rates to make borrowing more attractive. They do so by buying up government debt, thereby decreasing the supply of government debt and increasing the supply of currency, which lowers interest rates because there are fewer debts and more currency to buy them with.

Economists assume that there is a natural interest rate at which the economy grows at its trend rate while inflation is stable. There is no direct way to measure or calculate the natural interest rate. Economists estimate it using their theories and models. The elusive natural interest rate is a crucial element in central bank decisions. The natural interest rate may differ from the actual interest rate due to credit in the financial system. Deviations from this rate trigger booms and busts. The interest rate below the natural rate can generate a boom. In that case, people borrow too much because interest rates are too low, leading to overspending and overinvesting. An interest rate above the natural rate can lead to a bust, resulting in underinvestment and underspending. By setting short-term interest rates and thereby influencing long-term rates, central banks steer credit creation.

The economy can do well by itself

With Natural Money, the economy can manage itself, making fiscal and monetary policies redundant. The holding fee removes the zero-lower bound, providing stimulus during economic slumps. The maximum interest rate curbs lending during economic booms, providing austerity. That mitigates business cycles. And so there will be fewer debt overhangs and financial crises. The market, combined with the price control of the zero upper bound, steers interest rates and the money supply, thereby reducing the role of central banks. The central bank’s currency will then become a unit of account or administrative currency. Natural Money has the following favourable consequences:

  • The holding fee on currency allows for negative interest rates to provide a stimulus, while the maximum interest rate provides austerity by curbing lending.
  • As interest is also a reward for taking risks, a maximum interest rate will take away the incentive to take risks and limit lending to the safest borrowers.
  • In the absence of usury, debt levels don’t increase, while only the safest borrowers can borrow, resulting in fewer bad debts.

There is no need for governments to engage in deficit spending, except to provide liquidity in financial markets, as government debt, rather than administrative currency, serves as a form of liquidity. The holding fee makes it unattractive to own administrative currency. Provided their finances are sound, governments can borrow at negative interest rates and earn interest on their debts. They could aim for the debt level giving the highest interest income. If market participants are willing to lend at -1% when government debt is 100% of GDP and at -2% when government debt is at 70% of GDP, the government could harvest 1% of GDP in the former case and 1.4% of GDP in the latter case.

It will be the end of fiscal and monetary policies. The economy will manage itself. Interest payments don’t create a need to add additional debts. Governments may step in during a crisis to restore trust in the financial system and the economy, but whether such intervention will be necessary is unclear, as there will likely be fewer crises. Natural Money also doesn’t require central banks to do more than handle the daily transactions between banks, as the holding fee terminates the demand for the central bank’s currency.

Latest revision: 12 November 2025

Der Untergang der Titanic. Willy Stöwer (1912)

Harbinger of Things to Come

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In 2006 or 2007, a software upgrade of the disk controllers on the principal systems went wrong. For a week, they were out of operation. It was one of the biggest crises in the history of the government office CJIB, and perhaps the biggest of all. At the time, Kees and I were working on the systems renewal project at another location. The other database administrators dealt with the issue, as did many others. I knew there was a serious problem because we received regular email updates, but I didn’t realise how serious it was. After a week, the telephone rang at home. It was 9 PM. My wife, Ingrid, took up the phone. It was the IT director. He said there was an emergency and asked me to come to the office. His voice reflected fear. ‘As if the Titanic had hit the iceberg,’ Ingrid later noted.

I hurried to the office and arrived by 9:30 PM. Many people were still in. It was a massive crisis. There was an atmosphere of fear. The database administrator on duty, Dirk-Jan, brought me up to speed. I searched the database log files, found the error messages, and typed them into the Google search bar. In this way, I found an online document with the remedy. I then repaired the failures and brought the systems online one by one. Board members and senior managers were standing around me, watching me type. Solving the issue wasn’t complicated, but few people used Google to find the answer at the time.

I learned that the last backup was over a week old, and the mirror copy was offline. You may know what backups are and why you might need them, but you may not know what a mirror copy is. A mirror copy is a safety measure. If you own a computer or a mobile phone, it contains data. That data is on a device. In the early 2000s, it was usually a hard disk. If that disk fails, your data may be gone forever. If you lose some photographs of your late cat, you might feel sad about it, but after a few years, you get over it, perhaps after consulting your psychiatrist and taking a lot of pills.

Corporations can’t afford to lose their data. That would bankrupt them. Their business is their data. Without it, they are out of business. If you have a backup, only data after the latest backup may be lost, but that can still kill you, especially if you haven’t backed up for a week. We were a government agency, so loss of data wouldn’t have bankrupted us, but it would have been a national political scandal.

Corporate computers have multiple data storage groups in different locations. If one group catches fire or stops operating because of a failed software upgrade, the other groups still have the data. These groups are called mirror copies. We had two groups: the original and the mirror. You can imagine my bewilderment. We had no backup, and the copy wasn’t available. So much had gone wrong that it was a miracle that I succeeded in recovering all the data. But having no mirror and no backup meant we were still on the brink.

An even greater surprise was yet to come. The managers and the board wanted to return to business as usual and run the backlog of batch jobs. Then I said, ‘This is perhaps the most important advice I will ever give in my entire career. Don’t start the batch jobs yet. We are on the proverbial edge of the precipice. Running the jobs might just push us over. Everything went wrong for a week and there is no guarantee whatsoever that it will be all right now. We should bring the mirror copy back online and make a backup first.’

They planned to ignore my advice. Bringing the mirror copy back online and taking a backup would take eighteen hours of precious time. It was a lot of data to back up, as it was everything we had. I was a low-ranking official while the IT director had claimed there was nothing to worry about. But he had left the building. I kept stressing that making a backup was the right thing to do. ‘If something goes wrong that could finish us,’ I told them. It was the worst crisis ever. And so, I pressed for an extensive check-up to see if everything was in order. On that, they could agree.

During the check-up, I found another failure that everyone had overlooked. That scared the managers and the board, prompting them to start another meeting. And then they followed my advice. The IT director was no longer there, and they faced a determined saviour who told them in no uncertain terms that they were about to do something stupid. The operators brought the mirror copy online and made a backup before we resumed normal operations. In this way, rational decision-making prevailed. Nothing went wrong anymore, but no one could have known that beforehand.

If it had gone wrong, the agency would have survived. Operations would likely have had to stop for several weeks—that had already happened for a week—and it may have been impossible to recover all the data. That would have made the headlines. But it never came to that. When the local newspaper’s journalists smelled a rat, the board could tell them that the situation was under control and that the data was safe. My wife’s comparison of this situation to the Titanic hitting an iceberg was not entirely apt. Saving the Titanic once it had hit the iceberg was technically impossible. It would have required a miracle. What I did may have appeared to be a miracle, but it was technically possible.

The audit department later evaluated the crisis. The auditors noted that after a week of failures, all the problems suddenly vanished, which they found already hard to believe. What they found even more difficult to fathom, and they stressed the inconceivability of it during a meeting, was that after a week of irrational decision-making, sanity suddenly took hold as we had brought the mirror copy back online and made a backup. They couldn’t figure out why that happened. Our management had kept them entirely in the dark. I didn’t enlighten them either, as it would make our management and board appear incompetent.

My manager, Geert, complimented me for handling the situation. He stressed that my colleagues had been content with me. ‘I was a pleasant colleague,’ he added. Strangely enough, Geert didn’t say something like, ‘Your contribution was critical in saving us from a disaster.’ It reveals something about Geert’s thinking. To him, it was teamwork. Geert wasn’t present that evening, so he may not have learned the details of what transpired. And so, it didn’t help my career. A few years later, the senior database administrators received a higher salary grade, except me. Geert was involved in that decision. If you save people from their own stupidity, you shouldn’t expect gratitude. In this case, the truth had remained hidden because it would have hurt the egos of those in charge. My dealings with the crisis could be a harbinger of things to come.

Latest revision: 25 February 2026

Featured image: Der Untergang der Titanic. Willy Stöwer (1912). Wikimedia Commons. Public Domain.

Confucius. Gouache on paper (ca 1770)

Fairness Matters

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Working and sharing in groups

The greatest welfare recipient in the United States is Jeff Bezos, worth $279 billion, who pays wages so low that his workers rely on food stamps and Medicaid. He sailed his $500 million yacht to his $55 million wedding to give his wife a $5 million ring while his tax rate was less than 1%. He thinks that people are vilifying the rich. Other corporations like Walmart do the same. It is one of the reasons why our civilisation is failing. How could this have happened? It is because capitalism is our religion, and money worshipers think it is fair, and that the real injustice is the existence of food stamps and Medicaid. A communist has a very different view of fairness. Is there no objective measure of fairness? Sadly, the answer is no, but by investigating the issue, we can get a better understanding.

Humans are social animals cooperating in groups. We divide the workload and share the fruits of our efforts. How we do that is a matter of economics. The group might be a band of hunter-gatherers, a corporation or a society. We agree, either by negotiation, custom or force, on who does what and who gets what. Otherwise, we can’t work together. In a society, this agreement is called the social contract. It helps if we think the arrangement is fair. Violations of fairness provoke strong negative feelings. What is fair isn’t always straightforward. Some people contribute more to the effort than others, either because of willingness or ability. And some people have more needs than others.

Monkeys also have a sense of fairness. During a study, researchers found that if one ape received less valuable rewards for the same work than its partner, such as less tasty foods, it could become angry and reject the reward. You can become frustrated if your colleague gets a higher reward for the same job. Children have a sense of fairness early on. Giving one person more than another without reason can surprise toddlers. Children also wish to see you help those they like and harm those they dislike. They already prefer people similar to them (the in-group) to children who are different (the out-group).1

We believe that those who contribute more to a group’s success deserve more. If a venture’s success hinges on a single person’s efforts, we may reward this person more. It is an excuse for high pay for CEOs of large corporations. In a competitive environment, a CEO can make the difference between failure and success, while a factory worker can’t. When we cooperate, we are more willing to share, but in competition, we are more willing to accept inequality. In sports, the winner gets everything. Yet, if a team wins, the members share the prize, even if the team’s success depended on a few talented players.1

Moral fundamentals

The golden rule says you should treat others the way you want to be treated. Yet, the treatment people desire varies, depending on character traits or culture. For example, some people desire attention while others wish to be left alone. That may be an individual preference or a cultural trait. Apart from individual preferences and culture, there are general rules. Contributing to the group and not harming others in the group are the most basic ones. Yet, we may differ on the practical implications.

A most crucial issue is the groups we identify with. We cooperate and compete in groups, and what we consider good is good for the groups we identify with. The group can be a family, gang, organisation, tribe, nation, or humanity. And we can identify with multiple groups, so that you can run into conflicts of interest. Something can be good for business but bad for the community. We also differ on what is beneficial and harmful. Groups may face questions such as whether it is a good idea to go to war with another gang.

An interesting question is whether moral rules are innate or learned. If our sense of fairness is innate, moral rules apply to everyone. If it is learned behaviour, fairness is a matter of taste. If someone is helpful, we react positively. If someone acts harmfully, we react negatively. Infants already do that.1 And so, some of our moral conduct appears innate, and relates to being helpful or doing harm. Being helpful and not causing harm are the most basic moral rules, despite our disagreements in practical situations.

Ideas regarding fairness can be learned or cultural. Researchers tested children from several cultures to see how they would react to unequal rewards between them and another child when they were in control and could either accept or reject the deal. They always rejected deals that were unfavourable to them. In some cultures, older children rejected options that would have unfairly benefited them. Refusing a bad deal seems a natural instinct, but forgoing an unfair good deal is learned behaviour.1

Another, very fundamental, rule is might makes right. The powerful make the rules. What we believe is right and wrong greatly depends on power structures. The West conquered the world because of its cultural values, which included an entrepreneurial spirit driven by greed and inquisitiveness. The medieval Christian values were quite different. Its success leads many to believe that the liberal world order of capitalism and liberal democracy is good, even though we now face its failure. And so, only might can fix this issue.

The mistakes we make

Are we responsible for our choices? What is the influence of choice on fairness? During an experiment in which pairs of students performed a task together, one student received the pay. The one receiving the pay was randomly picked. Those who received the pay could choose how much they would give to the other. Receiving pay was a matter of luck, and most people believed it was unfair and were willing to share the pay.

Adding a choice, for instance, between getting a small reward or participating in a lottery to get the full reward, changes the picture. That made the participants less willing to share. If both participants opted to participate in the lottery, we think it is fair that one of them wins. People often think poverty is a choice, as poor people decide not to get an education or divorce, and, as a result, can’t work full-time.1

They made these choices, but sometimes they lacked better alternatives or believed that they did. Possibly, the small reward was not enough to live off, and participating in the lottery gave a chance of getting enough. The alternative to a divorce can be living with an abusive spouse. But then again, you could have paid attention before marrying. Perhaps a good education was too expensive, or you were unqualified, but you still have options and may even have a significant influence on your life.

If we don’t face the consequences of our choices, choices stop mattering. The unfairness of that becomes clear if two individuals with similar opportunities make different choices. If one decides to spend his money while the other saves for retirement, we think it is unfair to tax the latter to pay for the former’s retirement. In this case, it might be better not to have options and implement a mandatory retirement savings scheme.

In nature, there is no excuse for failure. Those who fail bear the consequences. It has a disciplining effect. Shielding people from the consequences of their failures is problematic. Their failure may be due to bad luck, like having a poor upbringing. And that is unfair. A society could help these people. Yet, the disciplining effect of bearing the consequences of your actions is essential to keep societies from collapsing.

Progressives focus on equality and seek to promote equal outcomes for everyone, but disparities in health, education, and wealth persist. Wealth inequality is partly due to the accumulation of capital and partly to individual circumstances and life choices. Conservatives think that working hard and making the right choices should make you better off.1 Some societies invest in equal opportunities, for instance, by investing in the education of underprivileged children.

Luck is everywhere

Luck is never fair, but it is everywhere. Some live long, some die early, some have love, some remain alone, some are healthy, and some suffer from severe illnesses. It isn’t always possible to fix that. Your place of birth, the upbringing you received, your education, and the opportunities you had in life affect your success in society. Successful people often think that their brilliance and hard work are the reasons for their success. Efforts and talents matter, but your success is also a matter of luck.

If we could eliminate luck, that would be fairer. Yet, not rewarding success, even when it comes from luck, results in undesirable outcomes as it promotes failure. If a group’s success depends on the risk-takers, the hard workers, or the talented, an extra reward can inspire them to do their utmost. Low-skilled labourers receive low wages because they are interchangeable. A minimum wage can help to reduce inequality.

The economy works with the forces of nature, which are cooperation and competition. We cooperate in groups, such as corporations, to compete or cooperate with other groups, which can also be corporations. These corporations operate in markets, so they sell their products at market prices and pay market wages. In a village economy, villagers can distribute the fruits of their endeavours in ways they see fit. Yet when markets exist, people may seek better deals outside the village, thereby undermining the community.

The shadow of the past

The past casts a shadow over the present. We live with the consequences of past developments. Your country of birth, as well as the family you grow up in, affects your life opportunities. The emergence and spread of capitalism have transformed the world. It brought a dramatic increase in wealth, but it came with exploitation. Today, there is a massive wealth inequality driven by economic relationships that some classify as exploitative and others as voluntary agreements.

Organisation and trade contribute to surplus value, but those in control take that surplus. Trade practices could turn into outright theft. An example is what the British East India Company did. It collected taxes in India and used a portion of them to purchase Indian goods for British use. Instead of paying for them, merchants obtained these goods for free by buying them from peasants and weavers with money they had taken as taxes. Through this scheme and other scams, the British stole from India.2

Had that theft not occurred, the Indian peasants and weavers would have been better off. Yet, they didn’t have a capitalist mindset like the greedy English merchants, and they wouldn’t have invested their money into new production methods and facilities to increase India’s capital. The wealthy British traders invested part of the proceeds of their thievery in the London Stock Exchange in ventures such as steam-powered factories. That capitalist spirit eventually raised living standards around the globe, including India.

History advantages some people and disadvantages others. In India, the caste system determines what jobs you can do. Some women in India have to clean toilets for $1,50 per month because of the caste in which they were born.2 The Indian caste system is a relic from the past. Those who inherit estates may think they deserve them because their grandparents wisely invested the money taken from poor Indian farmers, while those who have no such parents inherit nothing. Inheritance looks a lot like the caste system.

It may seem strange that we think that the caste system is unjust, while we think that inheriting large estates is okay. Yet, rules exist to make a society functional. If you can hand over your assets to your children, it can stimulate you to save or build a business, which can be beneficial to the economy. The caste system brings no such benefits. Yet, in a time where we face a capital excess combined with billionaires running politics, the inheritance of large estates has become a serious problem that needs addressing.

Latest revision: 5 May 2026

Featured image: Confucius (possibly the inventor of the Golden Rule)

1. The Price of Fairness (film). Alex Gabbay (2017).
2. Independence Day: How the British pulled off a $45 trillion heist in India. The India Times (2023).

Model Thinking

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Minimising surprise

A model is a simplified representation of reality, not reality itself. Likewise, a map is not the territory. The same goes for our language. The word tree is not the same as a tree. So, if there is a tree on the map, that says little about the scenery, except that there is probably a tree at the location designated by the map. What we think of as reality is also a model. Our brain doesn’t register reality but merely processes it. The outside world generates inputs via our senses, such as seeing, hearing, and touching, which the brain integrates with our memories and emotions. It is what we call consciousness. What we experience as reality is a model. A dog experiences that same reality very differently, and the dog’s experience centres more around smell. We may see a couch and notice its colour, while a dog smells that a cat has been lying on it recently.

The brain generates our perception of reality, and our consciousness is an integrated experience shaped by that brain, informed by its own expectations and the senses. The brain works with an expectation, and adapts it when the senses disagree. We imagine reality, and correct it if contradicting information emerges. It is efficient because it greatly reduces the need for information processing. The brain aims to minimise surprise by having the best possible representation of reality. If our brain fails, for instance, when we are sleep-deprived, the world begins to look unreal. And so, intense stress can cause psychosis. During dreaming, the integrated experience of consciousness remains active, except that the information may not come from the senses but from the brain itself.

We employ models of reality to explain the world. Together, they form our worldview. We try to minimise surprises because we depend on our worldview to survive. Models are imaginations. We may believe that X causes Y because after X occurs, Y happens. We infer our models of reality from our observations and thoughts, as well as those of others. Models have a wide array of uses, including weather and economic models. Using multiple models can help us to reduce surprise, because different models have different strengths and weaknesses. It is, however, crucial to understand that models are not true or false but aim to minimise surprise.

Your model of reality may say that all swans are white, perhaps because you base it on the swans you have seen. Once you see a black one, you change your view to minimise future surprises. That seems a rather straightforward case. You can also reduce surprise by ignoring evidence, as we have trouble handling complexity and contradictions. We may also do that because we are group animals who cooperate and survive based on shared fantasies. This project, The Plan For The Future, aims to overcome these limits to arrive at a comprehensive and accurate model of the relevant issues to fix the apocalyptic problems and outline the future world civilisation. My aim was also to minimise future surprise by facing the evidence that contradicted my views, and seeking better explanations.

Often, I would write down my views on relevant subjects, and every time new information came to light, I adapted my texts accordingly. Finding evidence and setting out the direction were my primary concerns, not the practical execution. The more accurate the direction is, the more straightforward the execution becomes. Hence, I focused on proving that this universe is a virtual reality, that God is a woman who married Jesus and Muhammad, that we can have a global usury-free financial system, and that we need to socially engineer the future world society to be the most socially advanced. That requires fine-tuning, but if the direction is incorrect, we will end up in the wrong place. And so, this model of reality has undergone over 17 years of work, with numerous revisions, and is far from complete, all in a frantic dash to minimise surprise in case my plans get executed.

Limitations of simplicity

Proverbs state contradictory things. One proverb says that two heads are better than one, while another says that too many cooks spoil the broth. How can both be right at the same time? There is an optimal number of people working on a project. It is a very simplistic view. The qualities of the individuals working on the project also matter, as do the available tools, and countless other factors. These proverbs only scratch the surface and are useless for practical purposes. The headcount is just one variable of many that you need to manage if you run a business or a government. If you decide on these matters, you don’t open up a book with proverbs for guidance.

A one-dimensional spectrum, so a line, with two opposites, ranging from one participant to a large number, can make you fail to see the solution. Perhaps it lies outside that line, so this way of thinking keeps us from seeing it. Maybe the project isn’t worth undertaking in the first place, or perhaps success depends on the right tools. The number of people working on the project may still matter, so you have to consider that also. The debate about capitalism versus socialism has dragged on for over a century and has dominated world politics during the Cold War. So, do we need more or less state interference in markets? Yet, markets and states don’t create agreeable societies on their own.

Economic models include multiple variables, such as employment, inflation, consumption, business investment, and government spending. You can add more, such as workforce education, market flexibility, foreign competition, and regulations. There are countless variables to consider. If you have identified variables, you need data to estimate their impact. Economic data is usually insufficient to achieve certainty, as changes can have multiple causes. How do you know that some other variable didn’t interfere with the outcome? Despite all the models central banks used, they didn’t foresee the 2008 financial crisis. So models can be wrong, and often are. The financial models did get countless other things right, but missing one crucial variable can already make the model fail.

Still, models can be helpful. The more models we use, the more errors we can eliminate, but even then, we may still miss something important. Our minds have constraints. We often take a perspective and reason from there. A socialist economist might be good at pinpointing why capitalism fails but may not see what is wrong with socialism. Economic theories explain specific phenomena under certain conditions. You might find additional explanations in psychology, sociology, or even history. You might want to check your ideas before trying. You can run the idea through several economic theories. That might give new insights. You can’t be sure you are right, but models help you eliminate errors.

Natural Money is research into an interest-free financial system. It draws from economic theories, monetary economics, banking, psychology and even history. I reviewed that idea using existing theories and historical evidence to investigate how it might work in practice. During the research process, unforeseen issues came to light. Once interest rates in Europe fell below zero, resistance to negative interest rates emerged. Savers prefer 2% interest and 10% inflation over -2% and 0% inflation, it turned out. That is irrational, but normal human behaviour, so humans are not, as economics may suggest, rationally calculating individuals.

We seem to measure our gains and losses in currency units rather than purchasing power. And behavioural economics says we give more weight to losses than gains. It is a reason why inflation and money printing meet little resistance, while negative interest rates make people go berserk. A 4% loss in interest income impresses us more than the 10% reduction in inflation because we count our money units. Emotions can be strong and make us act irrationally. And so, it is pointless to try to convince savers that they are better off. Once that became apparent, I could look for a fix for this particular human feature by making negative interest rates appear as inflation.

Insights models give

Models yield better results than uneducated guesses, and combining models yields better outcomes than using a single model. Models tie us to a mast of logic so that we are not carried away by our thoughts and can figure out which ideas are useful to us under what circumstances. Using data, we can calibrate our models, so if our model is wrong, we can investigate why and correct the error. Scientific disciplines like economics, sociology, linguistics and biology use models. According to Scott Page, models share the following characteristics:

  • They simplify by omitting irrelevant details and focusing on the essentials. Models abstract from reality.
  • They formalise by making precise definitions and providing a framework for logical thinking to explain and predict.
  • They are somewhat wrong because they simplify and omit details. The use of multiple models can reduce the errors coming from that.

Weather models make calculations, such as predicting that the maximum temperature in Amsterdam will be 26°C eight days from now. That is a precise calculation, but likely it is wrong. And so, weather forecasters use up to fifty models to make weather predictions. The average of these models is more reliable than the individual models. People who use a single model do poorly at predicting. They may be correct occasionally, just like a clock that has stopped is sometimes accurate, and then tout their few successes while forgetting about their much longer list of failures. Experts know that their models have limitations. When constructing a model, we can choose from the following approaches:

  • Aiming for realism by describing relevant parts and relationships. Climate models work with CO2 levels and their effects on temperatures.
  • Using an analogy by describing a process as similar to another. You can compare the ruinous growth of human activities with a cancer.
  • Exploring possibilities if limits change. You can explore what will happen when unlimited energy becomes available at no cost.

When making a plan for humanity that lasts a thousand years or more, numbers and mathematics become meaningless, and we have to do it with words. You can’t measure culture, but it is the central ingredient. And still, we must try to pin down things by modelling humans to predict what we can do and how it might work. You get observations like religion can save us because humans are imaginary creatures who cooperate on the basis of myths. This is a strong and meaningful statement without mathematics, and part of the model of reality that may save us all. And there must be an explanation why humans are like that and why they fail in any realistic scenario.

To illustrate the use of models, I have taken two examples from the course Model Thinking by Scott Page on Coursera that investigate why people of the same ethnicity often live together, and why revolutions are difficult to predict.

Sorting and peer effects

Groups of people who hang out together tend to look alike, think alike and act alike. If you look at the map of Detroit, you see people of the same ethnicity living together. Blue dots represent black people, and red dots represent white people. We can’t change our skin colour, so if we hang around with people who look like us, that is sorting. We also adapt our behaviour to match that of others around us. When you hang around with smokers, you may start smoking too. Alternatively, if you hang out with people who don’t smoke, you might quit smoking. That is the peer effect. Both sorting and peer effects create groups of similar people who hang out with each other. Models can help us understand how these processes work by modelling them.1

Schelling’s segregation model offers insight into the segregation process. It says nothing about why people move. That we seek out people that are like us is an observation. Why would people move? That is an interesting question, most notably if it points to problems. If we believe that skin colour shouldn’t matter, then why does it matter? Yet, the model doesn’t say anything about that. So, that is a limitation. Schelling developed a model in which individuals follow simple rules. Suppose everyone lives in a block with eight neighbours. Red boxes represent homes where rich people live, and grey boxes are homes where poor people dwell. The blank box is an empty home. Assume now that everyone has a threshold of similar people who will make them stay.


A rich person might stay as long as at least 30% of his neighbours are rich. Assume a rich person lives at X. In this case, three out of seven or 43%, of the neighbours are rich, like the person living at X. If one of the wealthy neighbours moves out, and a poor person takes that place, 29% of the neighbours will be rich, and the person living at X will move.

A computer can simulate how that works out over time. Assume there are 2,000 people; 1,000 are poor, represented by yellow dots, and 1,000 are rich, represented by blue dots. Suppose they are randomly distributed at the start, and everyone wants to live among at least 30% similar people. In that case, the average is 50% alike, and only 16% are unhappy because less than 30% of their neighbours are alike. As a result, people start moving, and you end up with an average of 72% similar and 0% unhappy.


Even when everyone likes to live in a diverse neighbourhood where only 30% of their neighbours are like them, segregation occurs. Segregation may not be the intention of the individuals involved, as they might be tolerant people requiring only a minority of similar people living in their neighbourhood.1 Whether that is indeed the case remains to be seen. But if it is correct, and if we believe segregation is undesirable, social engineering the ethnic or wealth characteristics of neighbourhoods by mixing homes for different income groups makes sense. Some countries plan neighbourhoods that way.

Peer effects cause people to act alike. Contagious phenomena are peer effects. They often start suddenly, seemingly out of nowhere. In uprisings and revolutions, extremists frequently determine what happens, as in the French, Bolshevik, and Maidan revolutions. Things could have proceeded differently. It is difficult to predict revolutions. Granovetter’s model offers possible insight into why that is so.

Suppose there is a group of individuals. Each individual has a threshold for participating in an event like an uprising and will join if at least a specific number of others join. If your threshold is 0, you do it anyway. If your threshold is 50, you start if you see 50 participants. The outcome varies depending on the thresholds of other people that might get involved.

Suppose there are five individuals, and the behaviour is wearing a suit. One individual has a threshold of 0, one has a threshold of 1, and three have a threshold of 2. The following will happen: one individual starts wearing a suit because her threshold is 0. The second individual joins because his threshold is 1. Then, the three remaining individuals join in because their threshold is 2.

If the thresholds had been 1, 1, 1, 2, 2, nobody would have worn a suit despite the group, on average, being more open to the idea. If the thresholds had been 0, 1, 2, 3, 4, and 5, everyone would have worn a suit after five turns, even though the group, on average, was less keen on doing this. In this case, extremist suit-wearers determine the outcome.

It indicates that collective action is more likely to occur with lower thresholds and greater variation. The influence of variation is surprising. It might explain why it is challenging to predict whether something like an uprising will occur. Not only do you need to know the average level of discontent, but you must also see the spread of discontent among the population and connections between individuals and groups.1

Yet, what motivates people to join a movement greatly determines the tresholds, and the model gives no insight into that. The British Tea Tax, which sparked the outrage that led to the Americans to declare independence, was actually a good deal for the Americans that would lower tea prices. The Americans had a good life, only no influence on British policies. They didn’t suffer like the Russians that started the Bolshevik Revolution. Yet, they risked life and limb for independence in the war the war that followed.

Proof in the pudding

Do similar people hang out together because of sorting or the peer effect? That is the identification problem. Sometimes, it is clear. Segregation by race occurs due to sorting as you can’t change your skin colour. Other situations are less clear, and you can’t tell whether it is sorting or peer effect as the outcomes are the same. Happy people hang out with each other, as do unhappy people. Both sorting and peer effects may have caused this.1 Happy people may seek each other’s company because they don’t like to hear the whining of unhappy people or the company of happy people makes you happier.

Models can provide insights as to why similar people hang out together and why revolutions are difficult to predict. Yet, they don’t tell the whole story. Other models help us investigate what might happen under which circumstances. Thus, models explore the dimensions of complex questions and help us identify the spots where the best solutions hang out. In this way, models can assist us. If we intend to get people to contribute to a cause, we might want to model human behaviour to see how we can do that.

If we see humans as rational beings, we can convince them with arguments to do the right thing. If we see humans as myth-belieiving creatures, an inspiring story can prompt them to act. If we think humans are calculating individuals, incentives and punishments can make them do the right thing. If we see humans as status seekers driven by pride seeking recognition, we might achieve the objective by telling them how great they are. You may get the best result if you use a combined approach, so multiple models. Not everyone is the same, so each approach may appeal best to a particular group of people.

Latest revision: 29 August 2026

Featured image: Line And Dot On A Grey Rectangle. The artist wishes to remain anonymous because who wants to be as famous as Piet Mondriaan?

1. Model Thinking. Scott Page. Coursera (2014). [link]

Dark Side

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Trade and finance


Capitalism has lifted billions out of poverty, but there is a dark side. Trade and finance, thus the profit motive, drive the system we live in. And that will eventually kill us. Now, we are almost there. Most notably 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. It is hard to pin down the issue, but they do not only bring the good things in life. Everywhere you see the death and destruction they cause. The ethic of the merchant is profit, nothing else. We think we can’t do without trade and finance, but can we do without moral values? The distinction between trade and crime is elusive. When governments fight the drug trade, they intervene in the market for opioids and prevent businesspeople from doing business.

Supply and demand always equalise at a given price, thanks to entrepreneurs. Hermes, the Greek god of trade, was also the god of thieves. Like thieves, traders don’t like toil and produce, but live off other people’s work. That is a caricature. Trade can be useful. Competition can be tough. And we can’t live without trade anymore, because we buy everything we need in the market, and many things we don’t need as well. Still, as the number of unnecessary products and services increases, trade proliferates. The pace at which we transform energy and resources into waste and pollution hastens as traders facilitate a competition, so we end up supporting an ever-expanding class of traders with our labour. The alternative is to produce as much as possible locally and accept a lower standard of living. That was Mahatma Gandhi’s advice.

Jesus Christ chased the money changers from the temple. Yet, in The Parable of the Talents, Jesus said that you must put your qualities to work. Talents were money, so it could mean putting your money to work. Jesus also 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. And so, you can take your pick and pimp your argument with Jesus’ words. Was Jesus a socialist or a capitalist? It is silly to think in such terms. Jesus lived 2,000 years ago, when economics as a field didn’t exist. Someone claiming to be Paul added that the love of money is the root of all sorts of evil. The Jewish writer Jesus Sirach noted, ‘A merchant can hardly avoid doing wrong. Every salesman is guilty of sin.’ Sirach made a few other peculiar remarks, like, ‘A man’s wickedness is better than a woman’s goodness. Women bring shame and disgrace.’ And so, you’d better take his words with a grain of salt.

Trade is a brutal force, and eliminating it might require drastic measures that few people have the stomach for. The Taliban are among the exceptions. You get the idea. You must first define what is good and what is evil, and then do whatever it takes, believing that the alternative is worse. And that is a belief because we don’t know the future. The prohibition in the United States led to increased crime. Is the drug problem in the Netherlands, where they are more relaxed on the issue, worse than in the United States? The opposite might be true. Yet, lax enforcement made the Netherlands a hub in the international drug trade for a while. And drugs are ruining millions of lives. Is eliminating the drug trade worth the effort? Perhaps, if we succeed. But then, we may have to learn from the Taliban.

Markets have no morals, and the ethic of the merchant is no ethics at all. The individual businessperson may have moral values and refrain from a trade, but traders as a group never do. Whatever you desire, it is for sale. Greed, or the pursuit of profit, drives trade. Still, you can’t run a business if the operations don’t cover the costs. Yet, if the business doesn’t provide anything essential, and consumes energy and resources, it had better not exist. Traditional moral systems accept that you should be able to make a living, but they hold that greed is wrong. We have gone a long way since then. Today, we see trade as mutually beneficial, so we believe that those who engage in a trade do so voluntarily because they all benefit, or believe they do.

The pursuit of wealth, regardless of the consequences, became not only the foundation of our economic system but also of our moral values. 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 once good has become evil, and what was once evil has become good.

Economists would even say that someone who is altruistic maximises personal utility, so that altruism becomes a selfish act. And the ascetic tries to maximise his personal utility by attempting to force others to live like him. An economist can’t imagine that we would do something good for the sake of goodness. The problem is not self-interest as such, but greed or the merchant’s ethic, and the difference isn’t clear. In any case, we have a suicidal appreciation of wealth. Had we looked down on riches and luxury and aspired to have just enough and do with less, this world could be a much better place.

Many merchants are people like you and me without evil intent. Shop owners make a living by providing 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. Still, something is profoundly wrong with trade. Individual merchants may have ethical values, but markets never have them. And trade drives the creative destruction that will ultimately destroy us. Yet, suppressing trade promotes illicit markets and crime. And so, we accept the drawbacks, thinking the alternatives are worse. And that is a fatal mistake.

A pragmatic approach is that outcomes matter more than intent. If the result of evil intent, such as 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 clothing 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, environmentalists, and also the Nazis, attempted to provide alternatives to the current order with their visions of Paradise. They all failed. The system is 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).