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Barataria: An Economic Fairy Tale


13 January 2024 (latest revision: 16 March 2024)


 
Het Wondereiland Barataria
 

Money makes the world go round, they say. And that is correct. Money directs our actions. Those who have savings hope to make a return. The financial sector directs our savings to investments. If you have a savings account at a bank, the bank will invest that money in loans and give you interest. If you buy a mutual fund, you invest in corporations. Finance harbours an unprecedented power. We are its hostage, but finance is also our hostage. When we invest, we desire profits, and the financial sector must deliver them. Profits on capital, usually called interest, drive economic growth and wealth inequality.

Before the Industrial Revolution, nearly everyone was as miserable as the poorest people today. Since then, capitalism has lifted billions of people out of poverty. There are benefits to entrepreneurship and enterprise. But there is a dark side to capitalism. It is exploitation, pollution, and the squandering of scarce resources. Trade and finance, not our values and needs, determine what happens to us and the world. We must blame ourselves. As consumers we desire convenience and as investors we desire profits. And often we don't think of the consequences of our actions for other people and the planet.

We suffer from money delusion. Our measure of success is GDP. And GDP does not equal well-being. If you buy a gun and go on a killing spree, the sale of the semi-automatic rifle, the costs of medics trying to save the victim, the salaries of the police going after you, and the price of your processing in the justice system all count as GDP. And so do the films from Hollywood glorifying violence and the merchandise that come with them. Cigarette sales and the subsequent cancer treatments all add to GDP. The advertisements, the consultancy fees and the litigation add to it, as does the building of lavish mansions for consultants and lawyers. Economists call it creating wealth. But it is not economical to store food, so there is only enough food in storage to feed humanity for a few months.

The problem is not a single trade or trader. Nor is it a single financial transaction or bank. Trade and finance are also useful. We can't have an economy without them. But if making money becomes our core value, we end up morally depraved. Depending on your political views, whether progressive or conservative, you see examples of how this corruption destroys progressive or conservative values. This is not only corruption in the traditional sense of people taking bribes, but money preventing us from doing the right thing.

In a competitive, economising world, we lack livelihood security and are under pressure to compete. As consumers, we are lured by convenience and social pressure to conform. Despite the dramatic increases in GDP during the last fifty years in advanced Western economies, life has not improved for many people. While the rich become richer, more and more people live from paycheck to paycheck and can't afford a home.

Trade and finance fuelled competition and thereby drove modernisation, colonisation, the slave trade, and the depopulation of the countryside. Several movements tried to confront the issue, like socialism, fascism, anti-globalism, small-is-beautiful, and environmentalism. So far, meaningful change remained elusive. Few people, such as the Amish, successfully established communities that largely remain outside the system. There are alternatives to the current system, but they also come at a price. That price might be worth paying.

The pillars under the current system are trade and finance. We must prevent money from driving our decisions so we can address our needs and choose our destiny. That will have repercussions for the returns on capital and interest rates. And so, the change probably requires an interest-free financial system with a holding fee on currency like in Wörgl and ancient Egypt. Natural Money is a research into the feasibility and consequences of such a financial system.

To explore the options, imagine a community that has tried other ideas. In the early 1990s, STRO published The Miracle Island Barataria, an economic parable by the Argentinian-German economist Silvio Gesell.1 I rewrote that story somewhat to make its message more clear. And I highlight the longer-term consequences we are about to face. And so the chronicle goes.


Long ago, on a faraway island


In 1612, a few hundred Spanish families landed on Barataria 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 suggested 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. And that would give everyone an equal opportunity to make a living. He also proposed introducing property so everyone would feel responsible. 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 kilogrammes of potatoes. The Baratarians agreed to the proposal. To cover the storage cost and because potatoes rot, banknotes had a date of issue and gradually lost their value. 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 the actual value.

For several years, Barataria had banknotes covered by 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. That would not have happened if the notes had a constant value. 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.'

That seemed too good to be true. And when something appears too good to be true, it usually isn't. 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. And if you are doing well, you can't imagine that seemingly insignificant errors can ruin you.

Most islanders preferred to spend their time getting drunk in the pub instead of studying the issues of government. And Marquez spoke passionately, while Martinez warned cautiously, saying things were fine the way they were and that he couldn't foresee the consequences. That may have 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 seeds.

The following spring, Barabino & Co. hiked seed prices. Most islanders paid more for the seeds than they received in interest. They went into debt with Barabino & Co. Then Barabino & Co. bought the harvest and cranked up food prices. Soon, Barabino & Co. owned everything. Most islanders 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 of the interest in their accounts. The Baratarians needed money to pay for the items they bought from Barabino & Co. They paid interest to use that money, and that interest ended up in the hands of the rich.

There weren't enough nuts to pay the interest from, so the islanders went further into debt. And this continued year after year. Consequently, the Baratarians worked harder and grew more creative in earning money. They 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 islanders grew accustomed to luxuries they hadn't before.

The chronicle tells us that this change came with other unfavourable consequences. It had undermined society. The Baratarians had become agitated, deceitful, and immoral. Crime was on the rise. Of their Christian faith, nothing remained except an empty shell. They were only interested in 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 the unpretty side of capitalism or how devious and nefarious acts contributed to a result most of us now see as desirable. Most people have a better life than most people in the Middle Ages. But that wealth came with war, colonialism, the slave trade, pollution, and miserable working conditions. With the help of saving and investing, capitalists build their capital. And that is often beneficial. Capitalism is about making sacrifices in the present by saving to have a better future by investing. In practice, it can come down to generating as much profit as possible. Morally reprehensible acts can have favourable outcomes, but founding our society on evil ultimately makes us evil.

Competition leads to a process economists call creative destruction. Businesses that don't produce something customers desire at a competitive price go bankrupt. As factories produced at lower cost, artisans lost their business, but fabrics became cheaper, and more people could afford them. And countless new products have come to the market that make our lives more agreeable. As production becomes mechanised, fewer people do the work we need, and more people waste energy and resources on jobs we don't need. You may think you need an espresso machine and social media, but you can do without them. It is a tale with two sides, like the Agricultural Revolution. Now, our chickens are coming home to roost. Capitalism as it is will probably end civilisation as we know it. That is why we must build our economy on values rather than profits.

Adam Smith, the father of 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 by how they thought it would affect others. 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 do not drive business decisions. Most people may have a moral conscience, but some do not or have moral values that allow them to trade. 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, gang warfare is often just business and a fight about market share between entrepreneurs.

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 wrote:

  • 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.
  • The size of the market limits the division of labour. High transport costs limit market sizes. Cheap energy drives long-distance trade.
  • People preferred precious metals as money as they could save them. It facilitated trade and finance as merchants could store their gains and make profits in finance.

  • Precious metals aren't money anymore. The tale of Barataria highlights why. As a means of exchange, it needs to lose value. But as a means of savings, it should retain its value. Central banks try to generate some inflation but not too much, so money can be a means of exchange and a store of value. There is also another reason. In this way, governments finance deficits by borrowing and promising to pay interest. Producers produce things at different times, locations, and quantities than consumers need. 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. And so, more people do things we don't need.

    In advanced economies, many people's jobs are pointless, bullshit jobs that waste energy and resources, but do not produce something we need. Imagine these jobs replaced by meaningful work, like police officers solving crimes, social workers helping disadvantaged children, and family and care workers caring for the elderly. On the market, labour has a price driven by competition, but in communities, we are free to reward contributions as we please. Labour efficiency only appears rational when there are abundant energy and natural resources. But that changes once resources and energy are in short supply. As our material wealth declines, we can lead more meaningful lives and address our needs.


    The 'evil empire' of trade and usury


    Economic power and financial power translate into military power. The Europeans didn't finance their colonial wars with taxes like previous empires but with the profits from their colonies. No one likes to pay taxes, but everyone wants a profit. The Europeans reinvested these profits, so their financial and military strength increased. After the bourgeoisie took control of the British government in the Glorious Revolution, the British state became a venture of the propertied class like the Netherlands and Venice. The bourgeoisie believed it could benefit from a functioning state and was willing to pay for it. Taxation thus became seen as legitimate as it came with the consent of the taxed. With its secured and enlarged tax base and a newly established central bank, 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. It allowed Great Britain to defeat France, a country with more wealth and a larger population. In France, wealthy people didn't pay taxes, and the government lacked funds. France defaulted on its debts several times, and its government was inept and corrupt, so lenders were unwilling to lend to the French government. With its control over the seas, Great Britain controlled the largest market, which enabled the Industrial Revolution because large-scale mechanised production required sizeable markets.

    Today, the United States is a venture of the propertied classes like Great Britain once was. Wealthy people pay little in taxes. The reserve status of the US dollar rather than an effective government is the primary asset of the empire of trade and usury. A corrupt and inept government is a boon to the elites. They bribe politicians to pass legislation they desire. They finance the think tanks that advise on policy matters. If things go wrong because the government is corrupt, they blame the government, saying there are too many regulations. The interests they represent might profit from fewer regulations. Or they blame the lack of government oversight and demand more rules. Their lobbyists may then make the regulations benefit the interest groups they represent.

    Americans can have a higher-quality government, but it is not in the interest of the elites. They only need a top-quality military and secret services to prop up their world order. And they need it to be corrupt to make it do what they want. The US finances its wars not by taxes but by the global usury 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 its debt with money that doesn't exist to finance its military and the extravagant lifestyle of its elites. As a result, the US is the world's greatest debtor, and its debt is the world's savings. Soon, resources will be in short supply, like trees on Barataria, and the world's savings will be worth nothing.


    Losing our human values


    In the past, people regarded trade and finance with suspicion. In popular culture, these were domains where people with questionable ethics thrived. Hermes, the Greek god for the traders, was the god of the thieves. And bankers are the worst. Did Jesus not chase the money changers from the temple? They turned the sacred temple into a den of thieves. And the Bible says, '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.' It is in the Catholic Bible. Jews and the Protestants didn't include it in their scriptures. That might be why the Catholic view on trade and finance differs from the Jewish and Protestant stances.

    Capitalism has been a wonderful fairy tale as long as it lasted. One day, we will all be rich. And indeed, even the poorest are mostly better off. The life expectancy in the poorest countries today exceeds that of the Netherlands in 1750, the wealthiest nation on the eve of the Industrial Revolution. But today, we take more than Earth can give us. We can't ignore that for much longer. And if we let the ethics of trade and usury guide us, we lose our values, whether they are Christian, Buddhist, Confucianist, Islamic, Hindu or traditionalist. We will value money more than people or the planet. We will not care enough to do what we need to do to prevent a disaster we can prevent without too much pain. In doing so, we lose our humanity, as behind those traditions are human values.

    Modernisation is about the rise of markets and governments at the expense of communities. Capitalism requires enlarged markets to enjoy the benefits of scale. Via capital income and usury, capital builds and concentrates in the hands of a few. Abundant natural resources and energy from fossil fuels made it possible. And the capitalists need the state to protect their interests or to appease disgruntled people with handouts. The concentration of economic activities and opportunities promotes the depopulation of the countryside and mass migration from poorer to wealthier areas.

    We likely have less energy and fewer resources at our disposal in the future, so we must live simpler lives and depend more on families, communities and nature and less on markets, governments and technology. Many of us think life must be perfect, but it never is. New technologies and products will not change that. Depending more on family and communities may not make us happier, but it could bring us closer to our human nature. The foundations of a future civilisation must both be sustainable and humane. We could build our future society on values rather than money. But that is easier said than done.

    1. Het wondereiland Barataria. Silvio Gesell (1922).