Economics and Musical Chairs
I started studying economics as a bright-eyed and bushy-tailed teen, intent on studying the subject that I was told would lead to a respectable career and maximum possibilities in life. I had a good grasp of the fundamentals from the beginning, with a relatively intuitive understanding of supply and demand as well as the basics of inflation and unemployment.
But there was one concept that I just couldn’t get my head around.
That concept was debt.
I remember toiling over my failure to understand one of the core ideas of economics, staring blank-faced at my economics teacher Mrs Beattie as she recited the textbook exposition of debt and interest. I was equally oblivious at home as my dad explained how businesses operated and expanded on the basis of bank loans.
Despite my seniors’ best attempts, I just couldn’t wrap my head around debt. I distinctly remember being embarrassed that everyone else in class seemed to have this understanding of this evasive truth that my little brain just didn’t have the capacity to ‘get.’
So, I decided to shut up shop, learn what I needed to learn for exams, and proceed, in classic Western-education style, to regurgitate answers that I’d read and pretend to actually understand the mechanism at play, all the way from school to university.
Surely, I couldn’t admit such vulnerability.
Everyone who studies economics gets debt, right?
But I just didn’t get it.
In fact, I still don’t get it.
Debt doesn’t make sense.
And the reason debt doesn’t make sense
debt doesn’t make sense.
How Money Works
“Where did the money come from? It came – and this is the most important single thing to know about modern banking – it came out of thin air. Commercial banks – that is, fractional reserve banks – create money out of thin air.” Murray Rothbard, The Mystery of Banking (2008)
I was initially taught that our debt-based money system works when someone puts savings into a bank and this money is given to someone else in the form of a loan.
In reality, when banks make loans, the money isn’t actually taken from anyone. It doesn’t come from Paul and go to Peter.
It comes from nothing.
97% of money in the UK comes from thin air.
97% of money in the UK comes not from the Bank of England, but from the inherent mechanics of a fractional–reserve, interest–bearing money system (same goes for the US). (I won’t go into an explanation of fractional reserve banking, other than to say that its mechanism means there is always a multiple of debt more in the system than there is money. See here for a further explanation).
Let’s say a punter called Paul goes to a bank and asks for a loan of £1000. The bank says okay, but as long as you give us back £1500 in 5 years time. Paul receives the £1000, and all is well.
But where is that extra £500 going to come from? Where will Paul get that extra money?
For interest payments to be met, Paul has to find that extra £500 from somewhere else in the system.
Because of interest, at any given moment, the amount of money owed is always greater than the amount of money already existing. To make new money in order to keep the whole system going, more goods and services have to be created, leading to a perpetual conversion of life into commodities (usually ‘objects’ that were hitherto free – childcare, land, sea). And since there is always a deficit between debt and money, we are in perpetual competition with one another for what is circulating.
Now this isn’t some secret that the banks are keeping from us. In fact, it’s just an accepted facet of the modern economic Machine.
The reason economists don’t tend to get their knickers in a twist about this is that interest-bearing money works smoothly so long as the rate of economic growth is greater than the interest rate. If you can borrow at 10% but increase your output by 20%, then you gain wealth in excess of what is given to the bank. Magic!
But what happens when the economy isn’t growing?
Do you remember the game, musical chairs? All is well and fun while the music is going, but as soon as it stops, all hell breaks loose for the remaining seats.
In a similar vein, not everyone can win in our monetary system, because the amount of debt (number of people) is greater than the amount of money (number of chairs). This is all good and well while the music (growth) is playing, but what happens when it stops?
There will always, always be losers when the music stops.
And here’s the killer point.
Our system is built on the assumption that the music won’t stop.
Our entire debt-based money system hinges on the necessity that growth will keep going forever. This is seen as an inherently good thing, as growth inspires innovation and progress.
But here’s the problem, if you’ve not already guessed it.
We cannot grow indefinitely in a world with limited natural resources.
As we’re seeing with our ecological crisis today, growth cannot keep going forever.
To keep growth primed, consumption has to keep rising, production has to keep increasing, and firms must continue to think of every way they can to make sure you pay for more stuff.
Since 2008, central banks, through quantitative easing, have been trying to keep the music going.
But if we look deeper into the mechanism at play here, we see that all they’re doing is kicking the can down the road of the realisation that we cannot assume infinite growth as an axiom in our economic models.
Are Humans Hungry Ghosts?
Since leaving university, I’ve realised that much of what I was taught was based on unquestioned assumptions. I took it for granted that professors, policymakers and the rest of the establishment had the answers, and so I rarely queried the foundations upon which they had formed their ideas.
Having dived further into the source of economic models over the last couple of years, I’ve discovered that the theories that dominate society are actually just extensions of snowballed belief systems. Hitherto I assumed market forces and their underlying assumptions were akin to Newtonian physical laws we’d discovered, rather than the subjective inferences that a handful of economists articulated as truths.
We assume that growth is fundamentally a good thing. Growth is Good with a capital G. Growth means the economy is expanding, people have jobs, and all is bright in the Garden of Eden. Rarely do economists question the downside of growth, despite its pursuit (and all of the industrialised activities that relate to it) being the key to the ecological disaster we find ourselves on the brink on.
In Economics 101, we are taught that since humans are self-interested and have unlimited demands (i.e. are gluttonous creatures who will never be fulfilled), there will always be scarcity. Economics is the study of the behaviour of humans given this matching problem – selfish humans with unlimited demands competing for a limited supply of resources.
Here’s the thing. If we have unlimited demands, then the logical next step is to build models and structures around infinite economic growth, because it makes sense that we must continue to grow indefinitely to account for the hungry ghosts that possess humanity.
Similarly, if we are indeed self-interested animals, then of course a system that rewards and accounts for competitive behaviour is optimal.
And here’s the link to our money system. We’ve built a debt-based system around the assumption of infinite growth, which is in turn a function of assuming that humans will always compete and never be satisfied with what they have.
But are these statements true? Are unlimited demands and rampant self-interest fair assumptions of humanity’s true nature?
Or instead, could unlimited human desires and selfish behaviour be results of our system, not the causes of it?
Might people desire more ‘stuff,’ because our economic system implores them to, well, want more ‘stuff’?
Might people act selfishly because our economic system rewards them for doing so?
When you look at sprinters in the 100 metres, they are demonstrating the aspects of themselves that are required in the race, such as speed, acceleration and determination. It is the nature of the race that brings forth these attributes. Usain Bolt doesn’t show you his high jump, nor his breakdancing skills, during the 100 metres. These aren’t parts of him that the system (i.e. the race) values.
Our desires seem unquenchable because money and possessions, the accumulation of which debt and growth are based upon, cannot fill the gaping internal hole that we carry that knows there’s something missing. We’re trying to fill our existential emptiness with more things, new inventions, fancier technology, an emptiness that materialism will never fill.
It’s The System, Stupid
Are humans inherently greedy and competitive? Yes, I think so. But is it not also true that humans have the capacity for solidarity? For selflessness? For altruism? For collaboration?
We are vessels for a multitude of attributes. It is the system that determines which behaviour is most prevalent.
This is where we’ve gone wrong. We’ve made a generalisation about the nature of human behaviour whilst engaged in the ultimate confirmation bias. We’ve found proof of unlimited wants and human greed while looking at a system that rewards and encourages those very aspects of our nature.
So although I agree that the world has limited resources, I do not believe that humans have unquestionable insatiability. We’ve translated an observation of human behaviour under certain circumstances and translated it into the truth of human nature in all circumstances.
And to those who say we need more economic growth to make the world a better place, I disagree. We need growth to keep the money system going as it is, for sure. But for the first time in history, we have ample resources for every single human on the planet to live comfortably. The fact that there is poverty is not a GDP problem. It is a resource allocation problem deriving from greed.
And greed is a prevalent behavioural outcome because the system that we’re in rewards it.
We Cannot Quantify Interiority
If our economic system were really serving our base human needs, would our current society not be the most fulfilled of all time?
Steven Pinker and Peter Diamandis have recently been proclaiming that this is the best time in history. They are using measurable statistics like GDP and life expectancy to proclaim that the world has never been better.
But what use is greater GDP if it leads to ecological disaster?
What good is an extra 20 years of living if your life is spent in severe depression and anxiety?
None of these authors are taking into account the intangibles.
How loved do we feel?
How connected do we feel?
How meaningful are our lives?
What are the systemic impacts of our actions?
What is the state of our interior mind?
How are we aspiring towards values, like truth and compassion?
And really, these aspects of life are life.
Our money-based system has put us all into competition with each other under the premise that this is the arrangement that brings out the best in us. We need to see money for what it is – a symbol and a social agreement that has become the God of our times, a God that is not aligned with the deeper questions above.
What if we were to change our culture around what it means to be wealthy?
What if we recognised greatness in society not through how much people own, but how much people give?
A cultural shift is required to transition us away from a money system that is based on debt and growth and towards one in alignment with values. This will likely only come about when the system fails under the pressure of its own distorted mechanics (the consumer debt bubble, inequality and ecological crisis are the core risk factors). But the articulation of an alternative is needed now, despite the unlikeliness of a transition while vested interests are still in play.
And an alternative, altruistic culture is not as idealistic as it sounds. Obese people in prior centuries were seen as the most attractive, as their size showed they had access to food. Pale-skinned people were seen as the most beautiful, as their skin demonstrated they weren’t outdoor labourers.
From this we see that our perception of what is aspirational is malleable.
Imagine if we created a culture in which we aspired to be givers, not owners.
A culture of ‘we-ness’ not ‘me-ness’.
In which money embodied the goodness of gift, not the gluttony of greed.
And to those who are sceptical, bear in mind that almost all of our aspirations – cars, houses, clothes, the latest gadget – are social signals. Never forget that we are, in part, animals using social cues as mating calls for the opposite sex, and demonstrations of where we are in the social pecking order.
When we recognise that our actions have their basis in social recognition, we see that when we alter what we socially perceive to be valuable and worthy, that which people aspire towards will change, and another mating call will come around.
For those who still aren’t convinced that this is feasible, does a fish know anything other than water? We’ve been swimming in a competitive debt-based system since we were born, so it’s nigh impossible to imagine something aligned with principles that are other than those we have grown accustomed to. The mechanics of the system – of limitless growth and limitless debt – are coming to an end. We must reformulate how we conceive of our relationship with money, debt and growth.
Was there wisdom to my unconditioned teenage self? An intuition that preceded societal memes and cultural norms? A sense of understanding that the mechanics of debt and money weren’t sustainable?
What I do know is that that wee guy inside of me has had enough of musical chairs, and thinks it’s time to play a different game.