The world economy is in a downward spiral and the blame game is in full swing. Bankers vs Tax Payers. Pundits vs Big Government. Free Marketers vs Socialists.
It’s all rubbish! Let’s have a look how we ended up in this big mess and what we should learn for the future.
And you want Money for that? – Human Culture and Economics
Trade, money, supply and demand are hardly modern inventions. Early humans already started trade routs all over the Mediterranean and Asia. You can find ancient goods from Asia in Europe and visa versa.
From Wikipedia:
The term economics comes from the Ancient Greek οἰκονομία (oikonomia, "management of a household, administration") from οἶκος (oikos, "house") + νόμος (nomos, "custom" or "law"), hence "rules of the house(hold)".
So trading goods and services is an essential part of human culture and has long been with us. Money was as essential for the Roman Empire as it is for the current American one or totalitarian States like North Korea, the former Soviet Union and China.
And our economies already worked on a huge scale: for example Chinese Silk was in demand all over the world. When the Europeans conquered the Seven Seas thanks to the gift of bloody Colonialism our Economy become a global affair (around 17th century).
Economic Ideas and Philosophies – and the problem of Wealth
Anyone remember the great beads crisis of 1302 BC?
Today we consider Adam Smith the Granddaddy of Economics and the Capitalist Philosophy. But economic research, philosophy and most of all laws go way back.
Ancient Babylonia and Egypt already had taxation and commerce laws. Book keeping and counting were already in these important government skills. And a visit from the taxman was as much hated by those old Babylonians as by you and me.
Already back then big heads like Aristotle thought about the moral issues of money and wealth and he was certainly not the only one:
Allocation of scarce resources was a moral issue to Aristotle, and in book I of his Politics, Aristotle expresses that consumption was the objective of production, and the surplus should be allocated to the rearing of children, and personal satiation ought to be the natural limit of consumption. (To Aristotle, the question was a moral one: in his era child mortality was high.)
In transactions, Aristotle used the labels of "natural" and "unnatural".
Natural transactions were related to the satisfaction of needs and yielded wealth that was limited in quantity by the purpose it served. Un-natural transactions aimed at monetary gain and the wealth they yielded was potentially without limits. He explained the un-natural wealth had no limits because it became an end in itself rather than a means to another end—satisfaction of needs. This distinction is the basis for Aristotle’s moral rejection of usury. Later, in book VII Chapter 1 of Politics, Aristotle asserts "external goods have a limit, like any other instrument, and all things useful are of such a nature that where there is too much of them they must either do harm, or at any rate be of no use, to their possessors" and some interpret this as capturing a concept of diminishing marginal utility, thought there has been marked disagreement about the development and rôle of marginal utility considerations in Aristotle’s value theory. Certainly this book formulates an ordinal hierarchy of values, which later appeared in Maslow’s contribution to motivation theory.
Aristotle’s Nicomachean Ethics, particularly book V.v, has been called the most economically provocative analytic writing in ancient Greece. Therein, Aristotle discusses justice in distribution and exchange. Still considering isolated exchanges rather than markets, Aristotle sought to discuss just exchange prices between individuals with different subjective values for their goods. Interestingly, Aristotle suggested three different proportions to analyze distributive, corrective, and reciprocal or exchange transactions: the arithmetic, the geometric, and the harmonic. The harmonic proportion is interesting, as it implies a strong commitment to the subjective values of the traders.
It has also be noted, that social unrest, poverty and greed were also plaguing our ancient forefathers. If you think you are treated like a slave go and watch Spartacus.
But this all shows that Commerce, Capitalism and State Intervention (Tax Code, Laws, Exchange Rates, etc) are essential part of our cultural evolution.
Modern Capitalism and the Invisible Hand
Adam Smith – to put him in his rightful place – is certainly the father of modern economics. Especially if you relate his most famous work "An Inquiry into the Nature and Causes of the Wealth of Nations" to Colonialism, international Trade (mostly done by European Merchant Ships) and the upcoming Industrial Age.
Adam Smith – himself a highly philosophical men – cemented with his writings several ugly capitalistic ideas in European Thinking:
- * rational self-interest
- * competition leads to economic prosperity
- * free trade
- * value of labor
- * and the concept of the Invisible Hand
Adam Smith mentions the metaphor in Book IV of The Wealth of Nations, arguing that people in any society will certainly employ their capital in foreign trading only if the profits available by that method far exceed those available locally, and that in such a case it is better for society as a whole if they so did.
But the annual revenue of every society is always precisely equal to the exchangeable value of the whole annual produce of its industry, or rather is precisely the same thing with that exchangeable value. As every individual, therefore, endeavors as much he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labors to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was not part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it.
The short version:
"It is not from the benevolence of the butcher, the brewer or the baker, that we expect our dinner, but from their regard to their own self interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages."
The People’s Revolt
Did Free Markets abolish Child Labor – or humanitarian and Government interventions?
Trade and Commerce in Form of Colonialism, Slavery (in the Colonies) and early Industrialism created some of the most brutal, unjust and devastating human conditions.
The Industrial Revolution caused huge environmental problems in Britain and other early industrial societies (and still does). There was no health care, no pension system, no workers protection or safety acts, no free educational system or political party that had the hard working lower classes in mind.
There was often social unrest (just like in ancient times or the middle ages), but these "problems" were solved as usual maybe a few concessions, but mostly with brutal violence.
Often plagued by poverty himself good old Karl was trying to improve the poor people’s suffering.
Karl Marx and his intellectual buddies are often blamed for inventing Socialism (and Communism), but the common men (workers and farmers) have always tried to balance the power of nobility, the state and the upper class "ownership society".
Organized labor – like commerce – goes way way in human history. Medieval Guilds can be seen as the first powerful labor organizations, protecting their members and advancing their shared interests.
Looking back in history Governments (or better say Nobility, Kings and Queens) always was "between" workers and masters. In the early days the masters and the "government" were more or less the same. The nobility owned the land and resources including the workers. It took a long time to form a society with a "neutral" government and a rule of law that no longer favored the "owners".
It was once again social unrest and the humanitarian attitude of the Age of Enlightenment that fuelled the change for better conditions and laws for the common men and women. Remember these were the days, when only a few people were allowed to vote or had actually any political influence.
The unjust political situation led to the huge popular movement of the Chartists (from Wikipedia):
Chartism was a movement for political and social reform in the United Kingdom during the mid-19th century between 1838 and 1848. It takes its name from the People’s Charter of 1838, which stipulated the six main aims of the movement as:
- * Suffrage for all men age 21 and over
- * Equal-sized electoral districts
- * Voting by secret ballot
- * An end to the need for a property qualification for Parliament
- * Pay for Members of Parliament
- * Annual election of Parliament
Chartism was possibly the first mass working class labour movement in the world. Its leaders have often been described as either "physical-" or "moral-force" leaders, depending upon their attitudes to violent protest.
It took many riots, protests, blood and tears to the right to vote for this British males. It took another big movement to get women the right to vote.
But that was just the beginning …
Social Reform for the emerging Working Class and new laws for Companies as well
Otto von Bismark introduced wide ranging social reforms and laws in Germany.
The Right to vote was not the end. Worker demanded more protection and social change all over Europe.
It was not just the idea of Socialism that fuelled the protests of workers – it was simple a question for survival. If you got hurt or killed in a Factory (which was not uncommon these day) you got no protection, no compensation or pension.
For example Germany introduced several laws specifically aimed for a more just and social society and to support for the emerging working class: the Health Insurance Bill of 1883, the Accident Insurance Bill of 1884 and the Old Age and Disability Insurance Bill of 1889 (pensions).
Historical side note: the German National Liberals were against these laws, because they feared State Socialism – very similar to current arguments by American Rights wingers against universal health care.
Once again these were not new inventions – the Ancients already different kind of social and commercial insurances.
The new Industrial Society also made it necessary to create new forms of companies, trade and laws alike. It was not just the lower working class that demanded new rights, there was also a new Middle Class: factory owners, merchants, stock brokers and traders. These newly rich challenged the power of the old (noble) establishment and also went into politics. It is no surprise that many agents of change were industrialists, scholars and social activists from this new middle class.
Once again it’s now surprise that the Ancient idea of the Stock Market came into full swing during the Industrial Revolution.
The modern Market was born: Workers, Stock Exchanges, Companies and the Government.
The Russian Revolution of 1917 and the Anti-Communism-Establishment
The new industrialized Europe fought it’s first industrial war from 1914 to 1918. This massive bloodshed showed that neither the old blood nor money were able to keep peace – and it were the workers who paid the price.
The Russian Revolution was not about Communism, it was about the war, poverty and incapable government. The Russian had suffered terribly under the war and their Tsar. In contract to Europe the Russian Establishment hardly changed – so a big bang was inevitable.
After the Tsar was removed the Soviets overthrew the Russian Provisional Government.
The Soviets showed their true colors pretty soon. Political terror, indoctrination, ruthless propaganda, firing squads and a total power grab followed. This first Communist regime hardly had the workers power in mind – it was simply a totalitarian regime with an imported political sticker.
But the European Anti-Communist-Establishment was equally fake: they mostly feared the loss of their own power and wealth if the workers would rise. And the danger of social unrest was a constant threat to Capitalists and Industrialists in European Countries. Although some reforms and concession had been made to the working class life was still brutal. And many Socialist and Communist parties were pretty active all over Europe – and often in sync with Unions.
Sharing wealth, health care, pension and a more just society can hardly be called communism – but a "decent life".
But sharing their wealth and giving even more rights to workers as neither an agenda for the Soviet leaders in the east as it was for their counterparts in the west.
The sad story is that many western economists confused the "pure" ideology of Communism and Socialism as preached by Marx & Engels with the bloody mess the Soviets produced in Russia.
The Invention of Consumerism and Mass-Greed – and the first global Recession
Let’s buy something nice …
As a counter culture to the Communist threat the west developed Democratic Mass Consumerism – also to help and develop it’s own industrial base.
The common men was suddenly important as consumer, tax payer and voter. All the changes (the voting rights, higher wages, social services and universal education) made the masses important and a lucrative business.
Plus the idea of Consumerism changed the whole economic equation. Before consumerism people bought only what they needed, based on practical everyday needs.
Consumerism introduced the idea of lifestyle choices and individualism by consumption. Even a working class person could express his style and personality by buying certain brands.
With an exploding customer base and mass production suddenly the upper classes was no longer the most important clientele in town. Also the middle class transformed – the rich merchants, traders und industrialists become upper class – and well paid worker became the new middle class.
The whole economy got an incredible boost and the Roaring Twenties were it’s result.
Also the financial markets discovered "little people" as investors. Suddenly the stock market was no longer a game the rich played, everybody was invited to become rich fast.
Where is my money you bastards?!
The universal greed let to an equally universal bust. The Great (Global) Depression was the result of unhindered "market forces" – or better say greed of small and big investors.
Plus the government did little to stop both from ruining the economy. Greed needs oversight, it doesn’t matter if it’s big banks or a worker playing with his life’s saving. (Here a great list of reasons / explanation for the Great Depression.)
The new Deal: more Powers for the new Middle Class and perverted Workers Movements
Who helps those who can’t help themselves?
Capitalism failed to restart global Economy by itself. In all countries massive Government interventions were needed to get the wheels going again. Plus many rules, regulations and oversight committees were installed to keep an eye on the banks, financial transaction and the stability of the global economy.
But the Global Depression also helped to get Anti-Capitalist parties into power: the Fascists in Italy, France and Germany. There was also a huge propaganda victory for the Communists, since Marx had predicted such terrible "Capitalist catastrophes".
All fascist movements started as workers movements – to support the little man against the evil (Jewish) Capitalism and oppression of totalitarian Communism.
We bring you work … and a world war …
For many disillusioned workers in Europe the Fascist Workers Movement was a thrilling alternative to the Capitalist and Communist system. Especially in Germany that was hit hard by poverty and hyperinflation after the Great Depression. The Nazi party was actually called the "National Socialist German Workers Party" (German: Nationalsozialistische Deutsche Arbeiterpartei, abbreviated NSDAP).
After WWII a new Consensus of Capitalism emerges
Forget the bloody war – all you need now is a washing machine.
The aftermath of World War had actually a very positive effects for workers. Since both the defeted Fascism and the still raging Communism were considered workers movement western democracies wanted to "include" the working class in the economic and political equation. The Government would take of Workers and the Economy alike – it was the time of Big Government that would make sure that there was never a reason for social unrest or injustice.
Overall the Keynesian Philosophy became the standard model for the economy in the west.
The war time citizens of all nations didn’t need much convincing. They had experienced the Great Depression and the greatest war of all times. They simply wanted peace and prosperity.
After WWII the working class basically became the middle class. A normal worker was able to raise a family, own a house and a car – and send his kids to university. That was the social contract between the war time generation, corporations and the governments. It often was a strong implementation of socialist ideas to keep the social peace. It was the invention of the welfare state.
And countries like Japan and Germany delivered a Wirtschaftswunder – America prospered thanks to it pumped up industry and new position as the leader of the free world, while Soviet Russia began a slow and painful decline thanks to it’s totalitarian system and planned economy.
Reaganomics and Thatcherism – Friedrich Hayek and his idea of Free Markets strike back
Friedrich Hayek – Übervater of the Free Marketers.
But not all was well in that brave new world. Western Societies suffered from terrible boom & bust cycles – and the cost of the gracious welfare ideology started to bankrupt the Governments. Suddenly "being nice" seemed unaffordable.
The welfare state had become perverted itself. It was no longer efficient and often to much overprotective. Companies and citizens alike suffered from red tape and the nanny state.
It was the time when the once despised prophet of Free Markets made his comeback: Friedrich Hayek and his Austrian School of Economists.
But there was a deeper change happening. The Industrial Revolution created the worker as the biggest class in society. Now the working class slowly disappeared in the West. The so called knowledge worker and service person replaced the classic manufacturing jobs – which started to move east.
The result of all these changes were Reaganomics and Thatcherism – the reinventions of modern capitalism, the ownership and service society.
The Trickle-Down-Economy: the rich piss on the poor.
Once again greedy, faster than ever before and with the Governments blessing. Old barriers, protections, red tape, oversight and limitations were removed one by one. Giant mergers ensured, new industries (like IT) and global giants emerged.
Unions came under fire from Governments and Companies alike. And the real income for workers ever since has fallen. The middle class started to disappear – and a new exclusive class of super rich emerged.
Overall social mobility and social justice has declined even in the richest nations.
The new greedy Philosophy of Free Markets – the Chicago School and Milton Freeman
Like Hayek before Milton Friedman became the Champion for Free Markets. His book and TV documentary Free to Choose (1980’s) (watch it all here) became a huge hit and the underlying theme for the next 29 years …
His basic mantra is "get the Government out of the Economy, the Free Market forces will fix everything by themselves".
Milton Friedman, a Nobel Prize winner in economics, called Smith’s Invisible Hand "the possibility of cooperation without coercion."
The Power of Lobbyists, the Corporate Government and the CEO President
The Manager became in the 1980’s the new hero, but already in the 1990’s their glorious image took some serious damage thanks to Enron and many gigantic failure.
But the political winds had changed companies and politics alike. Politicians formed Government politics by consulting focus groups (including Tony Blair and Clinton) – which means to listen to the selfish interests of consumers and hardly grand visions for a great society.
And companies more and more went into politics.
The 1980’s and 1990’s saw an explosion of global companies and lobbyism as well. Like never before companies invested in politicians, influencing the public and policy making alike.
Suddenly politicians were substituted for managers and the mantra was to run the Government like a big company. It was all about money and no longer about the social contract between the people and the government. The economy and the companies became the all important aspect of Government. The message to citizens was: if it’s good for the economy, then it’s good for you too.
Since experience managers had government positions and companies literally dictated the laws for themselves a vicious cycle of corruption began. Corporate crime was less and less punished or even prosecuted. And the laws allowed companies unfair practices.
The Madmen finally ran the Asylum and invented new forms of money making nobody else understood.
The Illusions of the Financial Markets
The Stock Markets made a huge transformation in the last thirty year: instead of investing in real companies and resources it become much more profitable in funds and "financial constructs".
Less and less money was invested in real companies, infrastructure, research and jobs – instead all that wealth was created "magically" by new financial models and products.
The global reach of such financial products became as alluring as the Big Stock Market Bubble before the Great Depression. Everybody wanted to get rich quickly. Small and big investors pumped huge amounts of money into the market – often buying "financial products" they didn’t understand.
And once again the Governments failed. Only a few countries effectively watched the financial markets and stopped the Gold rush.
Side note: Socialist Spain controlled their banks pretty tight, that’s the reason why the Bank Santander is now buying up their former competitors.
The Big Bang and the Desire for a new New Deal
Who should jump first?
So now it’s 2009 and we face a second Great Depression – for almost the same stupid reasons.
It shows that Capitalism is not social and it is often self-destructive. It doesn’t care if it’s sustainable or kills the underlying system / society.
Today’s financial markets have moved far away from benefitting the "normal" economy – serving only itself and it’s often very virtual products.
Governments have lost their way. They have become too much the slaves of Companies and Lobbyists.
Since the Battle of Economic Ideologies is over we seem to have no vision for a working society or better future. Communism has failed as much as Fascism. But so have proponents of Big Governments as well as Free Markets. Both are just ideas and have never existed in their purest form. Today they are simply political slogans – used to scare voters.
Instead of fighting old ideological battles we should concentrate on improving Companies, Government and our Societies alike.
New Rules
Let’s work together!
We need efficient and competitive Companies, that follow the rule of law and focus on doing business instead of politics.
We need Financial Markets that invest in real companies and real people. Artificial Financial Products should be kept to a minimum and under competent supervision. Plus they should be limited to a size that isn’t a danger to any Nations Security.
We need Markets that serve the Needs of People and Nations – and not Companies and Profit.
We need equally effective and competent Governments. Most Officials are not up to speed with the realities of our complex global economies and markets. Governments need to work on global standards, laws and oversights to keep the system running and safe.
We need social justice and a fair society that allows social (upward) mobility and offers solid support for the less fortunate. The Middle Class has to "re-grow" – it is the basis for a strong economy and prosperous society.
