Tag: finance

Confucius. Gouache on paper (ca 1770)

Morality Clause

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Legal is not always fair

Legal is not always fair. The role of morality in law may be too small. People have different views about right and wrong, so the prevailing view in many Western societies is that people should be free to do as they please unless their actions harm others. Even that view can justify an increased role of ethics in judicial matters. And if moral viewpoints converge, this becomes easier. That begins with setting priorities.

We can get trapped in contentious issues. People reason according to their beliefs and political views. Debates are often framed to make the opposing view look evil:

  • Leftists might be concerned with the rights of criminals in jail but not with the rights of unborn children who are innocent of any crime.
  • Conservatives might be concerned with the fate of unborn children but as soon as they are born in misery their compassion suddenly vanishes.

Science indicates that the degree to which a fetus is a baby gradually increases during the pregnancy. If you are religious and presume that an unborn child has a soul, it becomes a discrete process. When the soul enters the fetus, it instantly becomes a baby. These are two fundamentally different views. If you have one of those particular views, it may be hard to stay moderate. If there is a soul then abortion is killing an unborn child. If there is no soul, and a fetus has an awareness similar to a mouse, it is about the right of women to decide about what happens inside their bodies.

Moral issues are often complicated. Euthanasia can be an act of compassion but it can become a way of getting rid of undesired people. Perhaps criminals have mental issues, but making them suffer can give victims a sense of justice. In business, morality long took the back seat. In other words, in business, you can do as you please as long as it is legal, and making money is a virtue.

In some areas, ethics are needed urgently. Research has shown that CEO is the job with the highest rate of psychopaths while lawyer comes in second,1 possibly because traders in financial markets were not included in the survey. Media came in third because it was a British research. Salespeople make a rather unsurprising fourth position.

Vulture capitalism

Rural areas in the United States are turning into an economic wasteland. Closed-down factories and empty malls dominate the landscape. Communities are ravaged and drug abuse is on the rise. One reason for this to happen is that jobs are shipped overseas. Several factors contributed to this situation, but a major cause is CEOs not caring for people and communities. In many cases other solutions were possible.

Paul Singer is wealthy hedge fund owner. He made a fortune by buying up sovereign debt of countries in trouble such as Argentina and Peru at bargain prices and starting lawsuits and public relation campaigns against those countries to make a profit on these debts at the expense of the taxpayers of these countries.2

In the United States Singer bought up stakes of corporations in distress. He then fired workers so that the price of his shares rose. In the case of Delphi Automotive he and other hedge fund managers took out government bailouts, moved jobs overseas, and cut the retirement packages of employees so they could make a huge profit.2

Vulture capitalists prey on patients too. They buy patents on old drugs that are the standard treatment for rare life-threatening diseases, then raise the price because there is no alternative. Martin Shkreli was responsible for a 6,250% price hike for the anti-retroviral drug Daraprim. Many people died because of his actions.3 Perhaps he should be in jail for being a mass murderer but he is not because what he did is legal.

Profiteering at the expense of the public

In the years preceding the financial crisis of 2008 there was a widespread mortgage fraud going on in the United States. Few people have gone to jail because much of what happened was morally reprehensible but legal. Financial executives and quite a few academics share this view.4 And so nothing was done. Perhaps fraud can be proven some day but that may take years if it ever succeeds.

Healthcare is another domain for fraudsters and unscrupulous corporations. Patients are often not in a position to bargain. Perhaps that is why privatised healthcare performs poorly compared to government organised healthcare. In 2015 the Dutch government introduced the Social Support Act, making municipalities responsible for assisting people who are unable to arrange the care and support they need themselves.5

The municipalities were ill-prepared so fraudsters took advantage of the situation. Most businesses are legitimate but several private contractors enrich themselves at the expense of taxpayers and people in need. The Dutch prosecution is overwhelmed by fraud cases and it is not always possible to get a conviction because of loopholes in the law. Until these loopholes are fixed, several schemes remain legal.6

In the United States hospital bills are feared. A routine doctor visit for a sore throat can result in a $ 28,000 medical bill.7 And so many people in the US go without healthcare because they can’t afford it. Efforts to reform healthcare in the US haven’t succeeded, perhaps because those who send $ 28,000 bills for sore throats have plenty of money to bribe politicians into keeping the US healthcare system as it is.

Attributes of the law

First we have to recognise why it is so hard to prevent these things from happening. On the political front it is because once politicians are elected, they can do as they please until the next election. Lobbyists prey on them. Citizens have few means of correcting politicians, except in Switzerland. The Swiss have direct democracy. Swiss citizens can intervene in the political process when they see fit and fix laws if they think that is needed. Direct democracy might help to fix many of these issues.

Laws are often made with the best intentions but it is not possible to test them in a simulation to see how they will work out in practice. So once laws are enacted, unexpected problems pop up. The process of law-making is slow and it can take years before issues are fixed, at least if they are fixed at all because law-making is often political process, and that can make it rather complicated.

Even more importantly, the underlying principles of law benefit the savvy. The system of law is the way it is for good reasons. No one should be above the law and people as well as businesses should not be subject to arbitrariness. The rule of law implies that every person is subject to the law, including lawmakers, law enforcement officials, and judges. It is agreed that the law must be prospective, well-known, and general, treat everyone equally, and provide certainty. Only, in reality, not everyone is treated equally.

Laws being prospective means that you can only be convicted for violation of laws in force at the time the act was committed. Legal certainty means that the law must provide you with the ability to behave properly. The law must be precise enough to allow you to foresee the possible consequences of an action. Businesses prefer laws to stable and clear. Corporations invest for longer periods of time. If laws change they may face losses. If laws are not clear, investments won’t be made, and a country may end up poorer.

With the rise of neo-liberalism came the era of shareholder capitalism. Making profits became a goal in itself. Greed was considered good. Wall Street traders and CEOs were seen as heroes even when they were just psychopaths outsourcing jobs for profit. There was little consideration for the planet, people and communities. Consumers preferred the best service at the lowest price so businesses were pressed into cutting costs and moving jobs to low-wage countries. Ethics in business were a marginal issue at best.

A bigger role for ethics

More and more people believe that ethics should play a bigger role in business. Activists pressure corporations. That may not be enough. Corporations must be competitive and can’t make real changes if that increases their costs. Levelling the playing field with regulations is an option but that may not be sufficient. The law needs a morality clause, making unethical behaviour unlawful, even though the action itself is not explicitly stated as forbidden in the law. That increases the cost of unethical behaviour.

A randomly selected jury of laypeople could make verdicts on these issues. Perhaps the legal profession should stay out of these matters because it is not a legal matter in the first place. There are a few issues that come with a morality clause. Ethics in business can be a political issue. People may differ on what kind of behaviour is ethical and people may differ on what kind of unethical behaviour should be punished.

Introducing a morality clause to enforce ethical behaviour in business affects legal certainty. It will be harder for businesses to predict whether or not a specific action is legal. Business owners may incorrectly guess moral sentiment and believe they did nothing wrong. The uncertainty that comes from that might reduce the available investment capital for questionable activities. But that may not be so bad. And if immoral profits and bonuses from the past are to be confiscated, it affects the prospectiveness of the law.

International treaties like the Transatlantic Trade and Investment Partnership (TTIP) have been set up to accommodate the unethical practices of corporations and to protect those corporations from making those unethical practices unlawful. That is often what reducing the regulatory barriers to trade like food safety laws, environmental legislations and banking regulations often amounts to in practice.

In most cases, it can be known beforehand what actions are unethical. For instance, investors in corporations that extract fossil fuels should know that burning fossil fuels causes climate change. They are gambling on the future of humanity. So if some countries decide to outlaw the use of fossil fuels then these investors should not be compensated.

Perhaps you have serious doubts about this proposal as it upsets the very foundations of the current system of law. And I can imagine that you think: “Where does this end?” But there is something very wrong with the current system of law. Business interests often take precedence. So do you want the law to protect the psychopaths who maximise their profits at the expense of people and the planet? And do you really think that the law can be made without failures so that corporations and savvy people can’t exploit them?

Featured image: Confucius. Gouache on paper (ca 1770).

1. The Wisdom of Psychopaths: What Saints, Spies, and Serial Killers Can Teach Us About Success. Kevin Dutton (2012).
2. The death of Sidney, Nebraska: How a hedge fund destroyed ‘a good American town’. Charles Couger, Alex Pfeiffer (3 December 2019). Fox News. [link]
3. Vulture capitalists prey on patients. The Sacramento Bee (22 September 2015). [link]
4. How Mortgage Fraud Made the Financial Crisis Worse. Binyamin Appelbaum (12 February 2015). New York Times. [link]
5. Social Support Act (Wmo 2015). Government of the Netherlands. [link]
6. Gemeenten starten onderzoek naar Albero Zorggroep. Eelke van Ark (31 October 2019). Follow The Money. [link]
7. How a routine doctor visit for a sore throat resulted in a $28,000 medical bill. CBS News (31 December 2019) [link]

Beautiful countryside in southern California

Capital for the future

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Making the economy sustainable may require an unprecedented amount of capital in the form of knowledge and outfits like solar panels, sustainable farms and energy-efficient transportation systems. It is hard to imagine that it can be done. And imagining it is still a lot easier than really doing it. It is going to require some economic magic to divert investment capital from destructive activities to the future of humanity. We may need more useful capital and less consumption.

Perhaps the invisible hand can be of some help. It is easier to finance a great endeavour from investments than from taxation because nobody wants to pay taxes but everybody is happy to invest. It is the secret of the success of the European empires that conquered the world after the Middle Ages. England, France, Spain and the Netherlands were much poorer and smaller than China, India or the Ottoman Empire, but they didn’t finance their conquests with taxation, but with the use of investment capital.1

Europe won out because European conquerors took loans from banks and investors to buy ships, cannons, and to pay soldiers. Profits from the new trade routes and colonies enabled them to repay the loans and build trust so they could receive more credit next time.1 The same logic may need to be applied to making the economy sustainable. The challenge is so enormous that it may never be possible to finance it by taxes. Nowadays interest rates are so low because there is plenty of investment capital.

It’s the economy stupid!

It is often argued that the economy is unsustainable because of short-term thinking. The economy must grow in order to have positive returns on investments. And it is believed that returns on investments need to be positive otherwise the economy would collapse. The economic time horizons of individuals are reflected in their time preferences. The time horizon of the economy as a whole is reflected in the interest rate.

The lower the interest rate, the longer the time horizon of the economy could be. The following example from the Strohalm Foundation can illustrate this:

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

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

The long-lasting house now costs € 44,000 in the first year. The cheaper house now appears less expensive again. There is a yearly write off of € 6,060 but during the first year there is only € 20,000 in interest charges. Total costs for the first year are only € 26,060. Interest charges make the less durable house cheaper.2

Without interest there is a tendency to select long-term solutions. Interest charges make long-term solutions less economical. Interest promotes a short-term bias in the economy. It may explain why natural resources like rainforests are squandered for short term profits. If interest rates are high, it may be more profitable to cut down a rainforest and to put the proceeds at interest rather than to manage the forest in a sustainable way.

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

This also applies to investments in renewable energy. For instance, a solar panel that costs € 100, lasts 15 years, and generates € 150 worth in electricity in the course of these 15 years, is feasible at an interest rate of 5% but not at an interest rate of 10%. Many investments in making the economy sustainable may have low returns and are only feasible when interest rates are low. Low and negative interest rates can also deal with low economic growth. That may be needed for living within the limits of the planet.

Living within the limits of the planet

When interest rates are negative, the time horizon of the economy could go to eternity so that it makes sense to invest in making the economy sustainable. A few examples from history can illustrate this. In the Middle Ages some areas in Europe had currencies with a holding fee like Natural Money. As there hardly was economic growth, interest rates were negative. It was the era of Europe’s great cathedrals. These cathedrals were built for eternity. As better investment opportunities were absent, wealthy towns people spent their excess money on cathedrals.3 For similar reasons, the people of Wörgl planted trees as the proceeds of the wood were expected to occur in the distant future.3

A bit of calculus shows why. At an interest rate of 5%, putting € 1 in a bank account turns into € 1,05 after a year, so you would rather have € 1 now than in one year’s time, even when you need the money in one year’s time. That’s because you can put the money on a bank account at interest. At an interest rate of 5%, € 100 in one year’s time is worth € 95.25 now. The distant future has even less value. The same € 100 in one hundred year’s time is worth only € 0.59. And € 100 after 1000 years has no value at all in the present.

At an interest rate of -5%, you would prefer to have the money when you need it, otherwise you would end up with less. At an interest rate of -5%, € 100 in one year’s time would be worth € 105. The same € 100 in one hundred year’s time would be worth € 13,501 now. And € 100 after 1000 years would be worth more than everything there is in the present. Income in the distant future is also very uncertain, so it is unlikely that investors will shift their time horizon to 1,000 years, but this logic may help us to come into terms with the limits our planet poses on human activities.

Living within the limits of the planet may require unprecedented investments in the future. These investments may require low or even negative interest rates as their returns may be low. Only low and negative interest rates can make these investments economical. Everyone who has money to save can help by shifting money from consumption to saving and investing. The more people act like capitalists, the lower interest rates may go, and the more sustainable the economy may become.

Capitalists think that money spent on a frivolous item is money wasted, because when you invest your money, you will have more money that you can invest again. Capitalists hardly care about interest rates. They will save and invest anyway because of their capitalist spirit. Rich people may be encouraged to save even more if luxuries that use a lot of natural resources and energy aren’t available any more. One can think of luxury yachts, private jets, but also of travel by airplane for holidays. When energy becomes a constraint, local products may replace long-distance trade.

Featured image: Beautiful countryside in southern California. James McCauley (2005). Wikimedia Commons. Public Domain.

1. A Brief History Of Humankind. Yuval Noah Harari (2014). Harvil Secker.
2. Poor Because of Money. Henk van Arkel and Camilo Ramada (2001). Strohalm.

Arab farmer taking straw to his farm. Public domain.

Clutching at a straw

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I read The Limits of Growth in my late teens. Perhaps, I was twenty already. I was young and hoped to live for another sixty years or so. And suddenly, a computer told me that I would live to see the end. The evidence and the logic were convincing. For a long time, I had hardly thought about the impending doom. As a child, I sometimes feared the future when hearing the disturbing song Vluchten Kan Niet Meer or Fleeing Is No Longer Possible on the radio. It unnerved me profoundly as it painted a dismal time ahead where nature would be gone. But that faded once I went to secondary school. After finishing my studies, I became an environmentalist and joined a local Friends of the Earth group in Groningen in 1993.

Friends of the Earth is an international environmental organisation known in the Netherlands as Mileudefensie. They had local groups of activists, most notably in student towns like Groningen. The organisation researches environmental issues and tries to convince people they should change their lifestyles. Friends of the Earth also lobbies with politicians and pressures corporations. Our group was a hodgepodge of students, people with a job, unemployed, activists and ordinary people led by a woman in her thirties, who acted as an Akela at the boy scouts. A 22-year-old student was her boyfriend.

We were not militant like Greenpeace, but sometimes we protested. One day we blocked the entrance of Groningen Airport to protest against the government subsidies for the airport. The police came and told us to leave, which we did. I then concluded that activism would not help. We will not give up our comfortable lifestyles and vote out politicians if they are serious about solutions. And businesses will go bankrupt if they do more to save the environment than others. Their products would be more expensive, and we wouldn’t buy them. And so there were underlying economic and political issues to address. We organised ourselves around themes, for instance, vegetarianism, air pollution, and economic issues. And these caught my interest.

We were short of money, but that changed when I became the treasurer. I took measures to make expenses match income, but I also had some luck. Every year, we obtained a small grant of 2,500 guilders from both the Groningen province and the Groningen municipality. But when I became treasurer, the provincial administration had just denied the allowance we had received the previous years. And so I wrote an appeal to the Appeals Commission. I then went to the Provincial House to discuss the issue with the official responsible for the grant. He explained that it was because we had been late filing our request, and the money jar was already empty. And so, I asked him whether there was any point to the appeal. He said no. It was a done deal. Then I received an invitation for a hearing at the Appeals Commission. I decided not to waste my time by going there, so a commissioner called me that evening, asking me why I hadn’t shown up. And I told him. That probably touched a nerve, as I gave him the impression that no one took the Appeals Commission seriously. And so, our appeal was granted, and we received the subsidy. As I had made a budget that did not anticipate this money and had implemented budgetary discipline, we ended up with income exceeding expenses.

Once over a cliff, a cartoon character can only clutch at a straw. And only in animation pictures the straw holds. The Dutch saying clutching to a straw means grasping to your last hope. On economic issues, our local group worked together with Strohalm, or more precisely, Rinke. He lived in Groningen and was actively engaged in Strohalm and their ideology. As I remember, he was on social benefits, and working for Strohalm and Friends of the Earth was his job. He was serious about it and worked hard. The meaning of the Dutch word strohalm is straw. According to Strohalm, the economy must grow because of interest, and that’s destroying our planet. It is ‘grow-or-die’ because interest rates need to be positive. Interest charges also cause escalating debts, poverty and financial instability. And in the end, the scheme will collapse because the interest adds to the principal until infinity. Any solution begins with ending that, they believed. And as you may have inferred already, I was into sound accounting, so this made me think. Strohalm aimed to ban interest and charge a fee on money, as Silvio Gesell had proposed. You didn’t have to pay the fee on money lent. In this way, it could be attractive to lend money without interest.

In those days, Strohalm started a LETS (Local Exchange Trading System) in Groningen. We exchanged goods and services using fictitious currency. We had a camp to train our persuading skills as environmentalists. Rinke was one of the organisers. He praised me several times and called me an example for others. That was not because of my social skills but because I knew what other people thought and how they would react. My parents and some friends frowned upon me joining the environmentalist movement.

I soon realised that there were serious issues. If you can receive interest elsewhere then why would you lend out money without interest? And if you can borrow money at an interest rate of zero, you would borrow as much as you can and put it in a bank account at interest. Therefore, interest-free money with a holding tax would not work. Only, that wasn’t particularly satisfactory. If you accept doom then you might as well commit suicide. If interest is the root of many social and environmental problems, and can destroy human civilisation, you should make it work. And perhaps it could work. During the Great Depression, it had been tried in a small Austrian village and it was a stunning success.

I am concerned about the planet. For years, I used public transport. And I still do it for work. But at some point, I realised it was pointless. More and more people started driving SUVs. They didn’t care about the planet. So if I saved petrol by taking a train, there was only more for those people. It didn’t matter what I did. A car makes your life comfortable, and I didn’t aspire to higher moral standards than others. So, I bought a car in 2003.

In 1998, I became a freelance IT specialist. I worked for a small bureau named Betamax, led by Martien, a retired manager. I made lots of money, so I had some capital to invest. My first investments were small and unprofitable, as I believed that profits matter. At the time, loss-making internet startups did very well in the stock market, while profitable corporations did poorly. But I had trouble understanding it. And so I thought I had to stay informed about the financial markets. In 2000, I joined the investment message board Iex.nl. At the time, I still said occasionally, ‘With SuperBart,’ when taking up the phone. That was fun and it sometimes caused hilarious moments, for instance, once I expected a call from Ingrid, but it turned out to be Martien. And so, I chose this name as my avatar.

Later I changed my avatar into niphtrique after someone noted that SuperBart sounded arrogant. And since then, I never took up the phone anymore saying, ‘With SuperBart.’ I didn’t need that to feel better anymore. A strange thing about avatars is that you somehow become this person, SuperBart, on the Internet because people do not know you. And so, I introduced a few other avatars to be someone else and have some fun. Most avatars didn’t last long, except dikkevettebeer, or plumpy fat bear, who believed the stock market would crash to zero and the gold price would rise to infinity.

A colourful investment fund manager, Michael Kraland, ran the message board. He also wrote commentaries about his investments. At the time, he rode the hype of the internet and telecom bubbles. His strategy was risky and not sound advice to inexperienced investors. And because he was a bit of a boaster, he received nasty negative comments on the message board, including unproven accusations of wrongdoing. And perhaps also because he was a Jew, which might not be accidental, as he worked in finance. And even though, as far as I know, he never did anything illegal, I nevertheless found him a dubious character.

After some time, a day trader named Cees joined the message board and began sharing conspiracy theories with us. He found them on US message boards and websites. If the markets were about to collapse, a secret group called Plunge Protection Team would come to the rescue. A stock market crash could undermine confidence in the financial system run by Wall Street, so they didn’t allow that to happen. Many readers first ridiculed Cees. But after the internet bubble had popped, and even more so after 9/11, markets often miraculously recovered when they were about to crash. And so, his credibility gradually rose. And the gold price regularly cratered because of sudden selling at peculiar times when most markets were closed. Cees believed central banks were behind this to promote confidence in their currencies. He wrote that if the gold price were to rise, the public would lose trust in our money. When there is little trade, you can sell a bit of gold to make the price drop. The trick was to break a trend. Trend traders, called technical traders, would then join the bandwagon by selling more gold, bringing down the price even further.

That was new to me, and perhaps it wasn’t all true, but there was ample reason to be suspicious. I had already bought some gold for other reasons. I didn’t trust financial markets and those operating them. Those people make a living from your money, so these stories intrigued me. They might be pulling out all the tricks to keep the Ponzi scheme of interest-bearing debt going. After all, debts continued to grow, as did interest payments, so there could soon be a day of reckoning. And I had read The Limits of Growth, so I feared collapse was inevitable. And if the sky has come down on you once, you worry it might happen a second time. Hence, I was constantly on edge concerning my investments, which was not helpful for profits. And I was not good at picking stocks. And so, I bought gold as a long-term investment. I also hoped that gold ownership could help me weather a financial collapse.

I bought my first gold in 1999 before I joined Iex.nl when I learned on the news that the gold price had reached historic lows. And so, I went to my bank to open a gold account. They sent an investment advisor to talk me out of it. He said, ‘No one does that anymore. I know a man who has a silver account with us for two decades. And silver has gone nowhere all that time. Gold mines are making losses because the price of gold is only going down. You should invest in the stock market instead.’ I smelled apathy concerning the precious metals and concluded it could be the beginning of a long-term trend of rising gold and silver prices that might run for decades, which indeed has happened. And so, I pressed on and opened a gold account. Perhaps, they had a good laugh that day at my bank office.

In 2001, after the Internet bubble had popped, I pitched the idea of interest-free money on the message board of Iex.nl. My lack of knowledge of the financial system didn’t deter me. Everyone can participate in a debate on a message board, and you can exchange thoughts with people you would never meet otherwise. Others rebutted me time after time, but I didn’t give up. Lengthy discussions followed, and they took several years. As these discussions proceeded, my knowledge of the financial system increased. And with the benefit of hindsight, debates on the Internet can be more fruitful than academic debates, which often occur in closed circles, because you get more perspectives.

In theory, interest-free money is a sound idea because fixed-interest payments destabilise the financial system. But practical issues stood in the way. The supporters of interest-free currencies didn’t address them. And economists never took interest-free money seriously because if you can receive interest elsewhere, you will not accept interest-free money. Via gold websites, I became familiar with the Austrian School of Economics and their adherents. They question money creation by banks and the need for central banks and point at the inflation caused by money creation. Some hoped to limit money creation or to return to a gold standard. Usually, they were libertarians who saw the government as the root of all evil. And unlike St. Paul, they saw sound money and free markets as the root of all blessings. They were a most peculiar and fanatic bunch, and even though they were on the opposite side of the political spectrum, a comparison with communists is most apt.

Both ideologies are like religions. Like the communists have their prophets, such as Marx, Lenin and Engels, libertarians have them, like Mises, Hayek, and Rand. And both religions have holy books. Communists have Marx’ Das Kapital or the Communist Manifesto, and libertarians have Rand’s Atlas Unshrugged or Ludwig von Mises’s book The Theory of Money and Credit. If their ideology fails, communists blame the capitalists, while libertarians blame the government. They appear to see money as a goal, not a tool. If you held alternative views like me, they might accuse you f being Keynesian, which seemed worse than being Satan himself. To me, these people seemed misers obsessed with money. Perhaps it is not a coincidence that their hero, after which they named their website, is Ludwig von Mises. So Mises for misers, if you didn’t get it already. And even though Wall Street is much eviler than they are, they represent the worship of Mammon in its purest form. They believed they were always right, so they tried hard to convince me I was wrong with my ideas about interest. And so, I learned as much from the Austrians as I learned from Strohalm. And if you come to think of it, perhaps it is also not a coincidence that the miracle of Wörgl happened in Austria.

Two opposing fringe ideas, interest-free money with a holding tax and the Austrian School view of hard money, challenged each other in my mind. It is how Hegelian Dialectic is supposed to work. It was not so that I was constantly brooding on this issue, but I also couldn’t let it go. In 2008 this resulted in a synthesis, Natural Money. In a gold standard, you need positive interest rates to get the economy going. As a result, you end up with unsustainable debt levels that you can never repay in gold, so you must leave the gold standard. But when you do that, the sky is the limit, and debts can escalate to infinity. But limiting the interest rate to zero can curb money creation too, and stop irresponsible lending. If the money supply is stable and the economy grows, prices drop, including the gold price. And so, a well-managed currency with a holding fee could be stronger than gold. As the economy can do better without interest, interest-free money can give better returns. That was the beginning. In the following decade, I produced a more comprehensive theory with the help of modern monetary economics.

Latest revision: 30 January 2023

Featured image: Roadrunner and Wile E. Coyote. Warner Bros. [copyright info]

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).