Barataria: An Economic Fairy Tale |
13 January 2024 (latest revision: 3 July 2024)
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Before the Industrial Revolution, nearly everyone was as miserable as today's poorest people. Since then, capitalism has lifted billions of people out of poverty with the help of its pal fossil fuels. There is another side to it. Economic considerations, not our values and needs, determine what happens, leading to a mindless process that may ultimately terminate humankind. As consumers, we crave convenience, and as investors, we desire profits. Usually, we don't think of the consequences for other people and the planet.
They say money makes the world go round, but not without energy. Our measure of success is GDP, but it doesn't equal well-being. And it doesn't account for the future. Cigarettes and lung cancer treatments both add to GDP. Smoking and getting lung cancer treatments thus create wealth, an economist would say, as the owners of cigarette factories and drug companies make a profit. Many feel insecure or lack livelihood security in this competitive, economising world. Despite the dramatic increases in GDP during the last fifty years in advanced Western economies, many aren't happier.
The current system lacks values. People from both the right and the left might agree on that, even if they differ on what values society should uphold. Trade and finance have fuelled global competition, leading to modernisation, colonisation, the slave trade, mass migration, and the depopulation of the countryside. Various movements, such as socialists, anti-globalists, religious groups, small-is-beautiful, and environmentalists, have attempted to address this issue. A values-based economic system is the key to ending the current money-dominated order.
Socialism and capitalism have failed. But what are the alternatives? Can we live in harmony with nature? Can we reap the fruits of our labour and make capital benefit us all? Had the answer been straightforward, we would have figured it out by now. There are alternatives. 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 it to clarify its message and highlight the longer-term consequences.
Long ago, on a faraway island
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. At first, 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 together. 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 will 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 had suffered damage because no one had covered them against night frost.' He mentioned several other examples. Martinez said, 'If the strawberries are yours, you will protect them. And if you have a promising plan you think is worthwhile, you will 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 rot. At the next meeting, Santiago Barabino argued that they could set up a storehouse for the potatoes and issue paper money, notes you could exchange for potatoes if you needed them. 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 it to trustworthy villagers if they agreed to return notes representing the same weight. The notes lost value, so everyone spent their money quickly and kept 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. Because businesses didn't pay interest and there were no merchants, things were cheap in Barataria. The chronicle notes that the islanders acted as good Christians and helped each other.
Then Carlos Marquez came up with 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 short of money borrow it 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 Baratarians could use to save and make 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 gave them money in their accounts, but Barabino & Co. mainly bought 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 have to work and lived a life of luxury of the interest in 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. It is called usury. They paid interest on money that banks created out of thin air for the benefit of the wealthy.
Consequently, the Baratarians worked harder and grew more creative in earning money. The islanders invented, produced and sold more things, most notably, wooden items made from the trees on the island. Not everyone could keep up, so there were homeless people. But the economy grew, and the Baratarians grew accustomed to luxuries they hadn't before. They had wooden chairs, boxes, ornaments, toys, toilets, outhouses, carts and tables. The islanders had managed without these items before, but now, they believed they couldn't do without them. That is how our economy, founded on trade and usury, operates.
The chronicle tells us that this change came with other unfavourable consequences. The Baratarians became agitated, deceitful, and immoral. Crime was on the rise. 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. The islanders suddenly didn't have the wood to make the tools for harvesting their crops and starved. The Pinus Moneta was worth nothing. After all, you can't eat money.
Adam Smith and The Wealth of Nations
The tale tells how devious and nefarious acts contributed to a result most of us now find desirable. By selling our souls to the money god, most have a better life than people in the Middle Ages. But that wealth came with war, 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. And that seems beneficial, but it also led to a mindless process called competition. Capitalism is also about making sacrifices in the present by saving to have a better future via investing.
The Baratarians were in debt, so they had to work hard and be creative to make enough money to pay the interest. As there was not enough money to pay the interest, they went deeper into debt and had to work even harder and be more creative, producing an economic boom that ended in starvation once the trees were gone. The problem is that the Earth's resources are finite, and interest accumulates to infinite. Once there is nothing to buy or sell, money has no value.
Having a better future means valuing the future more than the present. When resources are finite, the interest rate should be negative. It should be better not to produce than to waste resources on things we don't need. But interest gives the present a higher value than the future. A euro now is worth more than a euro next year as you can go to a bank and put it on interest. And so, you will have more next year. It can make economic sense to cut down all the trees now and put the proceeds in a bank account at interest.
Investments must make at least the interest rate in the market, leading to competition. It leads to a process economists call creative destruction. Businesses that didn't produce something people desired or were inefficient went bankrupt. Factories produced at lower cost, so artisans lost their business, but fabrics became cheaper, and more people could afford them. Since then, countless new products have come to the market, making our lives more agreeable. As production becomes mechanised and automated, fewer people do essential work, and more people waste energy and resources on fanciful jobs no one heard of a few decades ago. And then the resources are gone.
Adam Smith, the founder of modern capitalist thought, argued that if everyone pursues their private interests, they can achieve the public good. A baker doesn't bake bread to serve the community but to make a living. That is why we have something to eat. Smith believed it would work out well as we are moral creatures. Individuals would temper their behaviour as they knew it would affect others. So, a Boeing CEO would never compromise passenger safety for a higher bonus. That is not how markets operate. Individuals may have moral values, but markets never have them.
Factory owners didn't consider the plight of the artisans they put out of business or the miserable working conditions of their employees. And if they did, they would go out of business. Moral considerations can't drive business decisions. Most people may have a moral conscience, but some do not. They provide harmful products like cigarettes, semi-automatic rifles and cocaine and even try to expand their market by advertising their products. A gun salesperson might argue that he allows people to defend themselves. A merchant will say, 'If I don't supply the market, someone else will, so why not take in that profit myself?' And so, we sold our souls to the money god.
Poverty was Smith's primary concern. Increasing production was the way out. Self-interest is an effective way to achieve that. Since then, production increases have lifted billions of people out of poverty. Smith argued:
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Producers produce at different times, locations, and quantities than consumers need. It is why we trade. Traders bridge those gaps by storing, transporting, and dividing goods. It promotes large-scale production and labour efficiency, so we need fewer people to provide for our necessities. That allowed for new products and services, and entire industries selling unnecessary items. Many people's jobs are pointless, bullshit jobs wasting energy and resources. If you live in an 'advanced economy', your job could be one.
Imagine these jobs replaced by meaningful work, like police officers solving crimes, social workers helping disadvantaged children, and care workers caring for the elderly. Or you have more spare time so you can care for your parents or children. On the market, labour has a price driven by competition, but in communities, we can reward contributions as we please. We fear we might not have enough if we end the current system. The tale of Barataria shows there is an alternative if we accept a simpler lifestyle.
The 'evil empire' of trade and usury
Economic power and financial power translate into military power. The Europeans didn't finance their conquests with taxes like previous empires but with the profits from their colonies. No one likes to pay taxes, but everyone wants a profit, so it became a success. The Europeans reinvested their profits, so their capital grew, and their financial and military strength increased. After the bourgeoisie took control of the British government during the Glorious Revolution, the British state became a venture of the propertied class, like the Netherlands. In the following centuries, it became the world's largest empire ever.
The British bourgeoisie benefited from a functioning state and was willing to pay for it. Taxation thus became seen as legitimate as it had the consent of the taxed. With its secured and enlarged tax base and a newly established central bank that could intervene in financial markets, Great Britain could borrow more in financial markets at lower interest rates. The bourgeoisie didn't like to pay for corruption or ineptitude, so the quality of the state improved significantly.2 However, trade and finance came to dominate government.
It allowed Great Britain to defeat France, a country with twice as much wealth and a twice as large population. In France, the wealthy didn't pay taxes, and the government was always short of funding. France defaulted on its debts several times. Its government was inept and corrupt, so lenders were unwilling to lend to the French government. With its dominance over the seas, Great Britain controlled the largest market, which enabled the Industrial Revolution because large-scale mechanised production required sizeable markets. In this way, Great Britain could repay its debts with interest.
The United States is a venture of the propertied classes like Great Britain once was. Unlike Great Britain, wealthy people pay little taxes, as in France before the French Revolution. World War II made the US the most powerful nation. Since the 1960s, the US gradually came to depend on deficits. Today, the reserve status of the US dollar rather than an effective government is the foundation of the US empire. The corruption in US politics is a boon to the elites. They bribe politicians to pass legislation they desire. They finance the think tanks that advise on policy matters. Today, US government institutions are of mixed quality. Most developed countries do better.3
The United States has become the centre of a global empire financed not by taxes but by borrowing in the international financial system, of which the US dollar is the central pillar. These expenses add to the debt pile. The US promises to pay interest on that debt. As a result, the US is the world's greatest debtor, and its debt is the world's savings. The US dollar reserve currency status allowed the US elites to dictate economic policies around the globe via institutions like the IMF and the World Bank, allowing the US elites to take much of the surplus production of the rest of the world. Soon, resources may be in short supply, as were trees on Barataria, and the world's savings will be worth nothing.
Losing our human values
In the past, ordinary people regarded traders and bankers with suspicion. Like thieves, they lived off the toil of others. In popular culture, trade and banking were the domains of people with questionable ethics. Hermes, the Greek god for the traders, was the god of the thieves. And bankers are the worst. Jesus chased the money changers from the Jewish temple. They turned a sacred place into a den of thieves. And the Bible adds, 'For the love of money is a root of all kinds of evil.' The Jewish sage Jesus Sirach noted, 'A merchant can hardly avoid doing wrong; every salesman is guilty of sin.'
Capitalism has brought us prosperity. Most people are better off than a few centuries ago. However, due to competition, it came with large-scale markets favour the least ethical. The issue thus also relates to scale. We feel more connected to people in our community than strangers in faraway countries. As we specialise, we depend more on markets and governments and less on community and family. And we take more than Earth can give us, so civilisation, as we know it, may soon end. We can't ignore that much longer.
As long as we allow the ethics of trade and finance to guide us, we value money more than people or the planet. In doing so, we will lose our human values, whether Christian, Buddhist, Confucianist, Islamic, Hindu, or traditionalist. We will also lose our humanity, as our values are behind our traditions and religions.
Money represents power. With the help of money, you can make others do what you want. And that is why money corrupts everything. Most people have moral values, but markets never have them. If customers are willing to pay for products, whether it is for weapons, child porn or cocaine, unscrupulous individuals provide them. Criminal gangs make people addicted to drugs. They are entrepreneurs seeking profit like cigarette manufacturers. We remain powerless as long as we let trade and finance determine our destiny.
We remain divided because we disagree about values, even when we agree we should base our civilisation on values. Those who are not idealistic think they are realistic and that it is stupid to let values guide us because it would make us lose the competition. And we fear poverty as the current system of trade and usury brought us prosperity. We accept guidance from economists rather than priests.
The final battle for the survival of humankind is not about liberalism versus conservatism, Islam versus Christendom, or Hinduism versus Buddhism. It is about human values versus money. The apocalypse is near, and we let it happen because we allow money rather than values to decide for us. Only if nearly everyone, thus most people in all the world's nations, agrees on what we should do can we take matters into our own hands and accept the consequences. We must recognise that we share similar values despite our cultural differences and disagreements.
1. Het wondereiland Barataria. Silvio Gesell (1922).
2. The Origins of Political Order: From Prehuman Times to the French Revolution. Francis Fukuyama (2011).
3. Political Order And Political Decay. Francis Fukuyama (2015).