Talking to My Daughter About the Economy

1. The origins of inequality: Geography, surplus, and power

Agricultural surplus gave birth to the following marvels that changed humanity for ever: writing, debt, money, states, bureaucracy, armies, clergy, technology and even the first form of biochemical war.

Geographical conditions shaped the development of civilizations. In Eurasia, agriculture and surplus production led to the emergence of complex societies with writing, debt, money, and states. This allowed for technological advancements and powerful armies. In contrast, regions like Australia, with abundant natural resources, didn't develop agricultural surpluses, leaving them vulnerable to colonization.

Surplus production created two types of inequality:

• Global: between countries that developed surplus-producing economies and those that didn't
• Internal: within societies, as those controlling surplus gained power

The accumulation of power through surplus control led to:

• Writing: to record grain deposits
• Debt and money: as a means of exchange
• States and bureaucracies: to manage surplus
• Armies: to protect and expand surplus
• Clergy: to legitimize unequal distribution

2. From societies with markets to market societies: The Great Reversal

The Great Reversal occurred: instead of the distribution of surplus coming after production, distribution began before production had even started.

Market societies emerged when land, labor, and capital became commodities. This transformation, known as the Great Reversal, fundamentally changed economic relationships:

1. In feudal systems:

   • Production came first
   • Surplus was then distributed
   • Debt played a minor role

2. In market societies:

   • Distribution occurs before production
   • Entrepreneurs take on debt to start production
   • Profit becomes necessary for survival

Consequences of the Great Reversal:

• Increased economic dynamism and wealth creation
• New forms of exploitation and poverty
• Debt became central to economic functioning
• Exchange value triumphed over experiential value

3. Debt and profit: The fuel of market economies

Debt, as Doctor Faustus shows us, is to market societies what hell is to Christianity: unpleasant yet indispensable.

Debt became essential to economic functioning in market societies. Entrepreneurs borrow money to start production, effectively bringing future value into the present. This process fuels economic growth but also creates instability.

The profit motive emerged as a necessity:

• Entrepreneurs must make profits to repay debts
• Competition forces constant innovation and efficiency
• Profit-seeking drives technological advancement

Consequences of debt-driven economies:

• Increased wealth creation
• Periods of boom and bust
• Growing inequality
• Moral and ethical dilemmas (as illustrated by the Faustus story)

4. Banking's black magic: Money creation and economic instability

The process by which banks create money is so simple that the mind is repelled.

Banks create money out of thin air by simply crediting borrowers' accounts. This power allows for rapid economic expansion but also creates instability:

1. During booms:

   • Banks lend liberally
   • Asset prices inflate
   • Economic activity accelerates

2. During busts:

   • Trust evaporates
   • Credit dries up
   • Economic activity grinds to a halt

The role of central banks:

• Act as lenders of last resort
• Attempt to regulate commercial banks
• Intervene in crises by creating money

Consequences of banking's "black magic":

• Amplifies economic cycles
• Concentrates wealth and power
• Creates a need for government intervention and regulation

5. Labour and money markets: Self-fulfilling prophecies

Just like Rousseau's hunters, entrepreneurs struggling to remain profitable in a market society are playthings of their collective expectations.

Labour and money markets are uniquely susceptible to self-fulfilling prophecies. Unlike markets for goods, they depend on collective expectations about the future:

1. Labour market dynamics:

   • Employers hire based on expected demand
   • Workers' incomes affect overall demand
   • Pessimism can lead to unemployment, reducing demand further

2. Money market dynamics:

   • Interest rates reflect expectations about future economic conditions
   • Low rates can signal economic weakness, discouraging borrowing
   • High rates can choke off economic activity

The Oedipus complex of these markets:

• Predictions about their behavior tend to come true
• This creates instability and amplifies economic cycles
• Makes simplistic "free market" solutions ineffective

6. Automation paradox: The struggle between humans and machines

It is another paradox hidden in the foundations of market societies that although most employers are dead against it, the workers' capacity to organize themselves, especially through trade unions, to demand shorter hours, higher wages and more humane conditions, is the antidote to the Icarus syndrome.

Automation in market societies creates a paradox:

1. Employers seek to replace human labor with machines to increase profits
2. This reduces overall purchasing power, potentially harming profits

The Icarus syndrome:

• As automation increases, production costs fall
• Competition drives prices down
• Profits are squeezed, potentially causing economic crises

Potential solutions:

• Workers organizing to resist complete mechanization
• Redistributing ownership of machines to all members of society
• Balancing technological progress with human well-being

The challenge: Finding ways to harness technology's benefits without creating mass unemployment or enslaving humanity to machines.

7. The political nature of money: Why apolitical currencies fail

To recap: controlling the money supply is our only faint hope of charting a course that avoids the Scylla of bubbles, debt and unsustainable development on the one hand, and the Charybdis of deflation and stagnation on the other.

Money is inherently political because its management affects different groups in society differently. Attempts to create "apolitical" currencies like Bitcoin face fundamental problems:

1. Fixed money supply issues:

   • Can lead to deflation as the economy grows
   • Makes responding to crises difficult

2. The need for state involvement:

   • To enforce contracts and property rights
   • To adjust money supply in response to economic conditions

The dangers of "depoliticizing" money:

• Can amplify economic crises
• May concentrate power in the hands of early adopters or wealthy individuals
• Ignores the social and political nature of economic decisions

The alternative: Democratizing monetary policy to ensure it serves the interests of society as a whole.

8. Market society vs. the environment: The need for authentic democracy

The only salvation, once trapped in this manner, is for citizens to demand the coordinated intervention of the state to write off unpayable debts. This is the only way the atmosphere can be cleared of the haze of debt and the process of recovery can begin.

Market societies struggle to properly value and protect the environment:

1. Natural resources without exchange value are undervalued
2. Environmental destruction can paradoxically increase GDP

Proposed solutions:

1. Commodification of nature:

   • Assigning property rights to natural resources
   • Creating markets for pollution rights

2. Democratization of resource management:

   • Collective decision-making on environmental issues
   • Balancing economic and ecological concerns

The core dilemma: "Commodify everything!" vs. "Democratize everything!"

The case for democracy:

• Markets fail to account for long-term environmental costs
• Democratic processes can balance diverse interests
• Only collective action can address global environmental challenges

The challenge: Developing authentic democratic processes to manage our economy and environment sustainably.

Last updated: January 22, 2025