the plan for the future
9 October 2020
Until very recently nearly everyone lived in abject poverty. Most people had barely enough food to survive. In 1651 Thomas Hobbes depicted the life of man as poor, nasty, brutish, and short. Yet, a few centuries later a miracle had happened. Nowadays more people suffer from obesity than from hunger while the life expectancy in the poorest countries exceeds that of the Netherlands in 1750, the richest country in the world in the wake of the Industrial Revolution.
In 1516 Thomas More wrote his famous novel about a fictional island named Utopia. Life in Utopia was nearly as good as in the Garden of Eden. The Utopians worked six hours per day and took whatever they needed. His book inspired writers and dreamers to think of a better world while leaving the hard work to entrepreneurs, labourers and engineers. Today many of us have more than they need but still we work hard and feel insecure about the future.
Why is that? The answer lies within the dynamic of capitalism. It is not enough that we just work to buy the things we need. We must work harder to buy more, otherwise businesses go bankrupt, investors lose money, and people will be unemployed and left without income. In other words, the economy must grow. That worked well during the last few centuries and it brought us many good things, but it is about to kill us now.
People in traditional cultures didn't need much so they were easily satisfied. Modern people in capitalist societies believe they never have enough. You can always go for a bigger house, a more expensive car, or more luxury items. Many of us do not need more. It is the advertisement industry that makes us believe that we do. We believe there is scarcity even when there is abundance. Therefore the economy must grow. That is what they tell us.
So what are the consequences of this belief? For instance, if you eat too much this is great for business profits. And if you become obese as a consequence and need drugs for that reason, you again contribute to business profits so this is even better. Meanwhile we are using the resources of this planet in a much faster pace than nature can replenish. Humanity is standing before the abyss. Civilisation as it is will not continue for much longer. The end is near.
What has this to do with interest? If we want more products and services, we need more businesses, so we need investments. To do investments, we need savings. And to make people save, we need interest to make saving attractive. Consequently investments need to be profitable to pay for the interest. But there can be too much of a good thing. If we don’t need more stuff, we don’t need more savings, and interest rates go down and may go negative.
Is it possible for humanity to live in harmony with itself and nature? We work harder than ever before and in doing so we destroy life on this planet. It is hard to change that. If you organise production differently then your products might not be sold at a price that covers the cost to make them. In a market economy the value of a product is the price it fetches in the market. Marketing often comes down to inflating the market price of a product or a service to make more profits.
In the past there have been two fundamentally different approaches to the economy. For instance, before Germany became united in 1990, there were a capitalist and a socialist Germany. Socialist Germany ensured that everyone was employed. People in socialist Germany had enough but they had little choice as to what products they could buy. For instance, in socialist Germany there were two kinds of yoghurt while there were sixty in capitalist Germany.
And there was little freedom in socialist Germany. The secret police were everywhere. When Germany became united the socialist economy collapsed. Most socialist corporations suddenly went bankrupt because no-one wanted to buy the products they produced. The ensuing reorganisation of the economy led to mass lay-offs and a staggering rise in unemployment. Ultimately 60% of the jobs in the former socialist firms disappeared.
Lives and entire communities in former socialist Germany were destroyed. People suddenly felt insecure about their future as businesses had to compete and make a profit in order to survive. In a market economy efficiency considerations determine what is produced. These efficiency considerations are the result of customer preferences as well as the requirement to make a profit. Loss-making businesses usually can't attract capital in a market economy.
The quest for efficiency means that fewer and fewer people are needed to produce the things we really need. To keep everyone employed in a capitalist economy unnecessary products and services must be produced when all needs are fulfilled, causing a rapid depletion of scarce resources as well as waste. At least in theory it is possible that we work a few hours per day and that resources can be freed up to address poverty and other social problems.
And what has this to do with interest? The profit a corporation is expected to make should be higher than the interest rate in the markets for money and capital. Because what's the point in making the effort and taking the risk of running a business if you can get the same return on a savings account? And so it appears that with negative interest rates corporations with zero profits can survive and that the economy doesn't need to grow.
Not so long ago an economist wrote a book that sent a shock-wave through the economic world because of stating the obvious primary cause of wealth inequality. The return on capital usually is higher than the rate of economic growth. Because capitalists reinvest most of their profits, capital grows faster than the economy most of the time. It can be proven beyond any doubt that capital can't grow faster than the economy forever. Something will have to give at some point.
And what has this to do with interest? Interest is any return on capital. Interest income is the income of capitalists. That includes business profits and interest on bonds. The graph shows that labour income as part of the economy has diminished in recent decades in the United States. And that is because the capital share of national income has risen. In the past depressions and wars destroyed a lot of capital. Since 1945 there hasn't been a serious depression or a world war.
The capitalist economy is like a game of monopoly. First everyone is doing great and capital is built in the form of housing and hotels. At some point some people can't pay their bills any more. To keep the game going, the winners can lend money to the losers. But at some point the losers can't pay the interest any more. To keep the game going, interest rates must be lowered, so they can borrow more. But at some point some people can't pay the interest again.
Sounds familiar? This happens in the real economy too. In a game of Monopoly we can start all over again. In the real economy that's not an acceptable option. It would mean closing down factories in another great depression or destroying houses in another world war. So the game must continue. In Monopoly the rich can lend money at negative interest rates to the rest so that they can pay their bills. In the real economy this may be possible too.
Monopoly features a scheme that looks a bit like a universal basic income. Every time you finish a round, you get a fixed sum of money from the bank. At some point the bank may end up empty. The rich can then lend money to the bank at a negative interest rate to pay for it. This might seem a stupid thing to do because Monopoly is just a game. But the real economy is not a game. It may need an income guarantee for everyone financed by the wealthy.
Can we have an economy that is humane and in harmony with nature? A few centuries ago no-one would have believed that we could live the way we do today and most people would have believed that it is more likely that unicorns do exist. If excess resource consuming consumption is to be curtailed, fewer options for consumers remain, for instance there may only be organic products, and the supermarket of the future might look a bit like those in socialist Germany.
That may not be so bad. People in socialist Cuba live as long as people in the United States despite the United States spending more on healthcare than any other country in the world. Cubans eat no fast food so they live a healthier life style. And Cubans suffer less from a negative self image than people who are exposed to the advertisement industry. Advertisements aim to make us unhappy with ourselves and what we have in order to make us buy more products and services. For instance, influencers on the Internet all do plastic surgery so that you think you need it too.
Like in former socialist Germany there isn't much freedom in Cuba. If the government is to regulate the fat content in fast food or the sugar content in sodas then we lose our freedom to become obese. And there may soon be illicit markets for those products as there are already illicit markets for crack cocaine. Alternatively, the government could even end our freedom to destroy life on this planet and kill our children. That is of course economic oppression, just like banning the sale of crack cocaine. But then again, having no alternative for a collective suicide could be an even more serious form of oppression
This is not good for economic growth. And it doesn't stop here. You can think of measures that make air travel prohibitively expensive. Like in socialist Germany entire industries will be wiped out and perhaps you must take a train. And what will Google and Facebook be without advertisements? What use will their massive data gathering have? Because of all the excess consumption lots of resources are spent on guessing what we want and trying to make us buy even more.
So what has this to do with interest? Such a change will cause massive economic shock like the reorganisation of socialist Germany. But it can be done and the economy will recover if interest rates can be negative. Before you say that it is more likely that unicorns do exist, the idea has already been tested during the Great Depression.1 The outcome is dubbed the Miracle of Wörgl for good reason. And evidence for the existence of unicorns has not yet been so forthcoming.
Natural Money aims to balance the supply and demand in financial markets, thus reducing the need for government and central bank interventions. It may only be feasible to end economic growth in a market economy if interest rates are allowed to go negative. Failing to recognise this may mean that the government has to take a greater role in distributing money and capital like happened in socialist Germany, meaning that products are made that no-one desires, which is wasteful.
If interest rates are low then the creators of ideas and makers of things are rewarded more. They are the entrepreneurs and labourers rather than the owners of capital. It is in the spirit of Silvio Gesell who believed that labour and creativity should be rewarded and not the passive ownership of capital. Only when there is a shortage of capital or more demand for goods and services than there is supply, people need to be encouraged to save.
The economy is already constrained by a lack of demand rather than supply. That will be even more so when excessive consumption is to be curtailed and the rich have fewer options to spend their money on. And so it may become possible to fund an income guarantee with income taxes as well as negative interest on government debt. This can empower the bargaining position of labourers so that the need for minimum wages may reduce.
It is better to have an income guarantee rather than a universal basic income because that would be cheaper. There is little to gain from handing out money to people that already have enough. And the scheme should provide an incentive to work. A simple example can explain how that might work out. Assume there is an income guarantee of € 800 per month and a 50% income tax. The following table shows the consequences for different income groups.
Perhaps it doesn't feel right that people are being paid for doing nothing. But nowadays people are paid for producing and selling things we do not really need and by doing so they endanger our future. Someone who does nothing at all can be worth much more for society than a travelling salesperson, a trader on Wall Street or a constructor who builds mansions for the rich. Of course it is better that people do something useful and useful people should be rewarded for their efforts, but doing nothing is always better than doing something stupid, and having zero value is always better than having negative value.
Another question is how this can be paid for? The Miracle of Wörgl shows us that the economy can flourish without growth when interest rates are negative so that most people will be employed. Money can still be a motivator to run a business or to go to work but less so than in the present. It doesn't have to stop people from starting a business. Many entrepreneurs didn't intend to become rich. They just wanted to be an entrepreneur or believed in the product they were making or selling. Still, there is no doubt whatsoever that a humane economy in harmony with nature will be very different from the economy of today.
1. The Miracle of Wörgl. Naturalmoney.org (2018). https://www.naturalmoney.org/blog/180619.html