There are two sets of things an OS does. It’s a user interface, app sandbox, and hardware abstraction. Android does these really, really well. It’s a fresh UI for fingers rather than mice. It’s the first to offer proper sandboxed security, so we can install apps written by random strangers, like we wanted to do since the 80s. It runs on everything and it’s free.

The other job of an OS is to be a deployment target for apps. A few years ago, the bulk and complexity of these APIs ensured the dominance of Windows. Now, the lock is breaking. Software is becoming a service. You don’t buy software, you download the app to access the service, or it’s just a Web page. Legacy software like Microsoft Office can run in VMs, or in the cloud.

I use a Mac today. Right now, it’s a better UI and sandbox than Windows. Last week in Japan I saw an ASUS two-piece Android laptop, where the screen detaches to be a tablet. As soon as Android gets a good form-factor and matures enough to run Windows VMs painlessly I’m switching to it, and so is everyone else!

Microsoft is sort of failing at the OS game. It holds business users and hardcore gamers, the two groups who use heavyweight apps, but the average customer has no reason to want a Windows PC. Apple could do all that Android does, but it decided to have no more than 10% share if the PC market – to get more it has to license the OS.

The new lock-in is not the CPU, since Intel won that one, and it’s not the bulk of the API either. Customers won’t invest in apps any more, only service providers will. The new lock is user identity – your Google account. Google fought that battle brilliantly and won.

Air travel is stuck in the 1960s. Not the planes. The planes have evolved greatly but the airlines, the service offering, and the experience are stuck in the ’60s

The airlines
Why do airlines still exist? Or rather why are the plane operators still so visible to the customer? Buying travel from an airline is like buying energy directly from a company that runs power stations.

Running planes is, for all practical purposes, a commodity service. Safety is governed by regulations and the economics are better the fewer and larger the planes. Aviation would be better run by commodity carriers.

The airports
Airports really like you leaving and shopping. They have glorious departure halls, usually filled with shopping malls selling goods unrelated to travel. Shopping is usually the last thing I want to do when leaving, not least because I’ve packed and checked my bags and don’t want to carry extra stuff on my trip.

Airports provide a miserable experience when arriving, and for the most part while transiting. The two most useful services they could provide, showers and short-stay rooms, aren’t there. Transportation to the city is difficult, and they dump you on the kerb, so to speak, to figure it out. And they don’t let you go shopping on your way home.

The travel offering
UPS has the right idea. If I want to send a thing from my home to someone’s office I ring them up, give them the origin and destination addresses, and they pick up and deliver the thing door to door.

If I want to get myself to the same place, it’s much more complicated. For a start, nobody sells the whole trip. The airline will sell me a trip from one airport to another. Well guess what: I don’t live at an airport, and I pretty much never want to travel to one.

I’m on a business trip to Japan right now, and this relatively simple trip involves two taxis, two flights, two trains, and three airports (each way). Thanks to market distortion the two flights are from the same company, but the rest are all different providers. I’m forced to buy the flights together, but all the other segments separately. What’s so special about flights?

By focusing on flights airlines fail to optimize transport end to end. Were EDI-CDG-NRT really the best airports for this trip? How about LHR-HND with trains at both ends? How about connecting in Moscow or Helsinki – they seem to be more favorably located. But the fixation on airlines hides those options. They are too difficult for me to arrange, too uncomfortable to take, or priced out of reach.

If instead of buying flights from airlines I could buy travel from a sensible door-to-door travel company I’d be buying the product I actually wanted. Then they could offer various levels of choice. I could take the “I don’t care, just figure it out” option, I could choose by metrics such as flight and stopover durations, or I could tweak all the details.

The main thing though is that if I’m buying door-to-door travel the travel company can optimize the whole trip, just as UPS can optimize its shipments. They can add train segments or stops at hotels. I don’t care, so long as someone is minding all the details and ensuring a certain level of comfort.

The booking process
Airlines are stuck on some 1960s idea of selling seats on scheduled flights between airports that nobody actually wants. Everyone wants to go from some street address to another street address within some range of dates. You can tell UPS this but you can’t tell an airline. The airline doesn’t even see your searches for travel between locations where they don’t already fly!

A sensible booking process would let you indicate the trip you want, door to door, dates, comfort level, and optionally a cash bid. The system could then offer you already priced travel, or take your bid and use it, along with everyone else’s bids, to adjust capacity. There would be no scheduled flights to fill. Larger or smaller aircraft would get allocated as needed to fulfill pre-priced and bid-for travel as efficiency as possible.

The travel experience
The airlines have their heads in the clouds when it comes to the travel experience. They think they control it, but for normal people on normal budgets (that means economy) evidently they don’t. My travel experience depends at least as much on the aircraft type, the airport, the security officials, and the ground transport as it does on the airline. The bit that is up to the airline is the most boring and least differentiated of all.

Because airlines realize this, but are stuck on this idea of selling you seats on flights, they try to make the “seating and flying” experience as fancy as possible. They also invented lounges, so they can control your “waiting in airport” experience. This results in ostentatious service for a few premium customers and a glum travel experience for nearly everyone. Here’s what travel should be like instead:

You check in your bag at welcome centers in town the night before your flight, if you wish. Alternatively you are picked up at home or at the welcome center about an hour before your trip. The travel company gives you a device that explains your itinerary and chaperons you through. You clear security at the welcome center, and your bags are taken care of until you get to your home or hotel room at the other end.

You get taken by coach or by train to an airport. Since we’re integrating transportation means, this could be a long trip. For example it could be a trip by high-speed train to a major airport hundreds of kilometers away. Airports could be built further from cities. Train stations and routes would need to be adapted accordingly. The airport doesn’t need to be as high profile as it is now, since your point of contact is the welcome center. Instead of having a big check-in hall, it’s train-to-plane. The airport also has short-stay rooms and restaurants to improve your transit experience.

The plane is laid out sensibly, which means seating a bit more spacious than economy, so you can shift and use a laptop, in a single class. Long flights could have premium seating such as recliners or beds, but since aviation is a commodity these are designed for comfort rather than for the illusion of luxury. There Is no meal. Airline food is really bad for you, and the plane isn’t a good place for eating. Technology permitting, the plane should offer internet and power rather than a boring selection of movies and magazines. In some of the space previously filled by first class seats they could put a refreshment stand and a treadmill.

The overall duration of the trip will most likely be longer, since part of the idea is to save the environment by creating efficient flights. Instead of a short hop and a very long intercontinental flight you’d be more likely to get two flights of similar length, with a more restful stop in the middle.

When you land you arrive at a pleasant lobby and get a chance to shower or rest for a few hours. This makes stopovers more pleasant, and lets you start your day refreshed at your final destination – especially if your flight arrives too early. You are then driven home or to your hotel, or if you prefer you get dropped off at the welcome center in town, which also functions as a visitor’s center. At that point you return your chaperone mobile device.

Competition and branding
OK, who thinks that competition and branding works well in the current airline system? The airline industry manages to be at the same time anti-competitive, filled with arbitrary and distorted pricing, and hyper-competitive to the point that good airlines regularly face bankruptcy. Airlines desperately try to market and distinguish themselves, yet for the vast majority of customers they have no differentiation. Through the wonders of market segmentation, the actual “sitting and flying” experience is overdone for some and below par for nearly everyone.

I’m proposing commodity aviation to recognize that it already is that. Treating the plans usually as commodities will actually help differentiate when they’re not. For example you could set preferred aircraft types without the complication of which airline flies them.

In this system the door-to-door travel companies become the new stars, and they compete on global reach and overall customer service. There are more opportunities to differentiate outside the aircraft cabin than in it. They’d generally brand the ground side of their service, especially their welcome centers, stopovers, and town transport. I’d expect leading logistics and service companies, rather than aviation companies, to dominate.

It would still be possible for the travel service companies to brand sections of the aircraft, trains, or the airports and stations. This would look less like exclusive service and more like competing coffee shops with their branded seating. Branding, for example one aircraft cabin with seating from three travel companies, say Accor, Virgin, and Easy aiming at different market segments would add some waste, but less than flying three planes on the same route.

Calling the looters criminals is self-serving hypocrisy to avoid admitting failure. All kinds of people commit crimes, but the category “criminal” is rarely helpful for the purpose of explanation. A “criminal” is someone who has freedom of choice and chooses to do something harmful for self-serving reasons. Say Bernie Maddoff, he was a “criminal”. A madman, terrorist, or rioter cannot be explained away as a “criminal”. You may wish to treat them harshly, but you have to ask further questions if you want to explain their behaviour. You should ask these questions so that you can reach and stop other people who may be on the same path. We don’t analyse “criminals” because we’ve accepted that greed, materialism, and selfishness are normal – we just expect people to control them. We do analyse abusers, extremists, and rioters because there may be something useful society could do to change their motives.

To dismiss rioters as “criminals” is to assume that their motivation has been to acquire trainers or PlayStations without paying, and that there has been a remarkably unlikely concentration of these “criminals” in poor UK suburbs over a particular week. Or else it is to assume that the anger, or whatever, they were feeling is normal, that it’s normal they would want to burn stores and break things, but they should just control themselves like normal people. These are not helpful explanations, so let’s please not call them criminals.

So, after admitting and apologising for failure, Cameron needs to start failing less. Then the question opens, what kind of failure was this?

If you think the UK should be a dictatorship, the answer is simple. It was a failure of force. The government didn’t police these communities hard enough, so they were able to revolt. We need more police using harsher methods, so that people can’t revolt. Perhaps we should also prevent people communicating through scary online means, so they can’t organize revolts. Remarkably, Cameron is proclaiming that this is the situation, claims that more police is needed for our good dictatorship, and the media roundly agree. I can’t say if the British people really agree, or if they thought it through, but certainly plenty of enthusiasm for a totalitarian UK is being expressed.

Of course, the people don’t really want the whole of the UK to be a dictatorship. The good non-rioting people want their part of the UK to be a democracy and that other bit, where “criminal” rioting people live to be a dictatorship. Only that bit. Maybe they could wall it in. Or maybe there can be a floating dictatorship that follows the bad people wherever they sprout. These ideas of government won’t do either. Governments are not systems with one rule set here and another there. These systems are called occupations, ghettos, or apartheid. A government of any moral merit has to apply equally to all its territory and all its people. Otherwise the relationship between Chelsea and Ealing will be like that between Tel Aviv and Gaza: unloving and disrespectful.

If we want the UK to be a democracy, which hopefully we still do, it has to be a democracy for everyone and everywhere on the land – including in Tottenham or Croydon. Now for the tricky bit. A democracy does not quell or enforce obedience upon its citizens. Democratic citizens do not, as a group, obey laws for fear of policing. They obey laws because they think the laws are right, or else they would vote the bad laws and their proponents out. Democratic citizens consent to having a professional police to deal with the few people, criminals, misfits, or whatever, who don’t fall in line, only because a standing police works better and is fairer than vigilantism. The police are not there to enforce government upon the people. In a democracy you cannot police the majority. If you do, or you find yourself having to do, it’s not a working democracy any more.

The 2011 UK riots, like those in Athens a couple of years ago and those in Los Angeles two decades earlier, were set off by police violence that people there and then saw as brutal repression. In the UK the facts of the original shooting aren’t clear yet, but that was the perception. The thing is, police violence happens. Sometimes it’s a mistake, sometimes it’s genuine callous brutality. In a healthy democracy, these incidents don’t cause riots – they cause some protest, an investigation, and hopefully some measure of justice.

What happened in London, and in similar historical cases, is not protest or crime but small-scale revolt. It was the point when the community felt police no longer had legitimacy to use force on them, and government no longer had their consent to manage their society. What people do afterwards is not constructive. They reject police and its violent methods of keeping order, so they cause chaos. They see an economy that excludes them, so they destroy the edge of the economy that they can see, in terms of shop fronts. They feel isolated and shut out of any collective action, so they gloriously band together to burn vehicles. They’re used to a life where they can’t make a difference, this is a way of making a difference, so they take it. It’s not a positive or intelligent way of making a difference, but I’m sure if your life is pretty meaningless it feels empowering, communal, and fun.

It’s healthy that this loss of government power can happen. For a government supposedly based on consent, it’s market discipline. It’s the subjects saying “no thanks” to the governance on offer. If the possibility for government to lose its legitimacy isn’t there, then government doesn’t have legitimacy in the first place. It’s imposed government like that of Syria or China. That doesn’t mean that rioting should happen, or that the rioters are doing a good thing. The threat of civil disorder or disobedience is the way the people discipline a democratic government. Under ordinary circumstances, the implied but distant threat of civil disorder forces government to govern well and creates a good society. Government needs to manoeuvre to stay within the envelope of people’s consent way before civil disorder becomes a realistic concern. This is what the present, and in fact previous, British governments failed to do.

In this case the UK police didn’t lose its legitimacy overnight in Tottenham, nor did people in other poor cities suddenly reject government when they heard of the news. Government and/or police had lost legitimacy over years, or never earned it for a segment of the population. Public consent was already effectively below zero, and the event of a police shooting was just a trigger that made a latent condition overt. This is not a problem that’s fixed at the point it is expressed, by massive suppression, or after it is expressed by systematic oppression to make the population once again submissive. It a problem that should have been known and fixed long before the legitimacy of government wore out, before any riots became likely. Now that the riots have happened, the solution is still not in repression but in belatedly doing what should have been done already: restoring the legitimacy of government and re-earning the civic consent of Britain’s derelict communities. It’s slower and more complicated to do this than to police people to pulp, but it’s both the moral way forward and the way with the lowest long-term cost.

Britain has long had a section of its population written off. They’ve been turned from working class into a surplus class: relatively uneducated and not valuable as a workforce, obviously low-income and thus not very valuable consumers, and adequately distracted by addictions or popular entertainment not to be a significant political force. Ordinarily, us nice middle class people meet the surplus class people on buses that cross between cheap suburbs and downtown, or they harmlessly heckle us as we walk by depressing pubs. Well, a small fraction of the surplus class revolted last week. Is that so surprising? What’s surprising is it doesn’t happen more often.

Britain must not have a surplus class. These people aren’t going to disappear, or die out, or emigrate to America. It’s tempting, but nonetheless inexcusable both morally and pragmatically, to treat them as a problem to be contained. This is what Cameron wants to do, in keeping with past practice, and it’s wrong. It is never moral, under any circumstances, to write people off.

Rather than send these people to prison or keep them drunk on chemical “cider”, Britain has to take on the messy, human, difficult task of rebuilding the dignity of its lost once-working class and re-integrating it into society. This effort may impose some costs on shiny middle class. It may mean allocating some land for public housing that isn’t deliberately awful to keep the price of private housing high. It may mean providing a welcoming and open public space in cities, for people rather than for brand billboards. Or it may mean letting the poor control some capital so they could set up subversive entities like local shops, and politely asking monopolist companies such as Tesco to yield an inch to the small-scale economy rather than strangle it as completely as they do. Another revolutionary idea is that the British economy might have room for sectors other than finance, high-tech, and retail. Perhaps a well-rounded education system might once again make possible an economy with more layers than a privileged top, a thin technocratic elite, and a barely employed unskilled mass.

I don’t know exactly how to fix Britain’s poor suburbs and re-integrate its surplus class. I belong to the thin technocratic elite, and that middle class seems barely cohesive enough to me. But there’s plenty of good understanding of these social issues and what to do about them. There are credible figures thoroughly within the establishment, such as the archbishop of Canterbury, who can offer good advice. Cameron should take some.

A public good is also not the same as a good whose provision is a moral necessity. Sometimes the two are aligned, but they’re not the same. Providing food is a moral necessity, but usually it’s handled as a private good. Public transport isn’t a pressing moral necessity, but I argue it is best handled as a public good.

At a certain point on its demand curve, a good is marginally public if the net benefit to society increases when the price, or other barrier to consumption, decreases. It is marginally private if the converse happens. Colloquially we can say a good is public if it’s marginally public for all realistic price points, and we can call a good private in the converse case.

Here are some examples:

• Oil, or other energy is marginally private for most price points because using more than necessary depletes resources or damages the environment in a way detrimental to society. However at very high prices it becomes marginally public: It needs to be subsidized or rationed enough to enable essential services.
• Education is marginally public up to school level because it’s worth living in an educated society whether or not you are a kid or have kids. It continues to be marginally public at college level because equal opportunity access to life skills is good for society, and because a skilled society is a better society. Education may become marginally private at the research level, where too much abstract research could arguably be a waste.
• Health is marginally public for the entire middle of its demand curve. When people are ill, they want to be treated to get better, pretty much universally, and they don’t want to be treated too much or for no reason. Health becomes marginally private at low acuity level, where people may get over-medicated, and at high acuity level where resources spent on patients with desperate prognosis could do more good elsewhere. Having said that, preventive medicine and insurance can make each end of the curve marginally public.
• Food is marginally private for most price points because there’s a lot of individual preference and because overusing food is a waste. However at times of famine, for destitute people, or otherwise at the low end of the demand curve, food becomes marginally public.
• Music, software, Google, and other information goods are marginally public from the bottom of the demand curve, where they’re free and aimed at the mass market, up to the point where they become specialist services able to command a high price. Information goods tend to be misperceived as private goods, and therefore mispriced too high causing underuse or price evasion. Lowering the price or monetizing indirectly would increase net benefit to society. Google has it right and the MPAA has it wrong.
• City transportation is marginally public at the lower part of the demand curve. Buses, subways, trams etc. should be free because having easy transportation is valuable to all (even rich people, since it allows poor people to get around) and because the transaction cost of having fares, fumbling for change in your pocket, etc. is a waste. Transport becomes marginally private at the taxi or car level, so cities should collect fees from private road users.
• Communication bandwidth is marginally public for low usage levels and becomes marginally private as you want to do more high-end things, host sites, have mobile video chat, etc. Phone companies are fleecing the public by treating it as a private good throughout, but within their offering they try to approximate the pubilc/private inflection by charging a flat fee that covers low usage levels. For historical reasons, land bandwidth has more public economics and mobile bandwidth positioned itself as more private.

When considering what’s marginally public you have to take account of the marginal change of utility to society with respect to pricing (or any other barrier to consumption), as well as the marginal change in the ability to finance the good. Reducing the price, dropping controls, or making it free increases use, and if that increases utility to society it’s probably a public good. If reducing the price makes the good too hard to finance, so that too little is produced and society suffers, it’s probably a private good.

But you need to consider both direct and indirect ways to finance the good. For example health, transport, or music take real cost to produce. One way to finance them is to charge consumers. Other ways include taxation, charitable sponsorship, and indirect monetization such as advertising. The good is marginally public is there’s some way to finance it that makes it so, not necessarily the current way it’s financed.

The textbook treatment of public goods tends to focus on the supply side and ignore the demand side. But the demand side effect of pricing is important. If you make access difficult, adversarial, and expensive you’re pretty much guaranteed to reduce demand. You may think that’s inevitable if you believe a-priori that your product is a private good. But if in fact it’s a public good, you’re doing a disservice to society and should think of ways to monetize it as a public good.

1. They trade at fair prices and even balance (no borrowing). That’s stable and arguably fair, but overall trade is limited by how much the lazy people can produce. Even though the boring people could produce more to sell, the lazy ones can’t produce enough to afford it.
2. They trade at skewed prices. Everyone produces as much as they can. The boring people essentially barter their suff with the lazy people, so there’s a net transfer of value from boring-land to lazy-land while the money balance stays even.

These are the two overall options. For the first option, which we’l call “fiscally responsible” there are two variants:

• The boring and the lazy people actually limit their production and consumption of traded goods to what the lazy people (and therefore everyone) can afford. This is what Germany says that every country ought to do if only they were sensible like Germany.
• The lazy people borrow from the boring people to pay for the goods they buy, so they accumulate a debt at the rate of their productivity imbalance. Eventually the boring creditor people call in the debt, taking away the bankrupt lazy people’s assets. This makes the lazy people even less productive and less able to afford goods, so in the long run this is just a more traumatic way to keep the total size of the economy small. That’s what the private debt markets try to do, previously in the third world and now in peripheral Europe.

For the second option, which we’ll call “growth oriented”, there are three variants:

• The boring productive people just sell their stuff at half the price the lazy people sell theirs, or to put it differently prices are set socially (a month’s work fetches a certain price) ignoring the productivity advantages that a group may possess.
• The lazy people borrow to pay for the stuff they buy, but the debt is nominal only. Debt can accumulate to any amount, interest is effectively zero, and there’s an infinite supply of finance. The Unites States’ debt is like that, since it’s in dollars and the US is able to print dollars and convert it to inflation/devaluation if needed.
• The lazy people borrow to pay for stuff, and the debt is real. However, when debt becomes too much it is rescheduled: The nominal amount is renegotiated, a payment holiday is agreed whereby interest drops to zero, or something equivalent. This is what Latin America, Southern Europe, and other poor indebted low-net-productivity economies need to do.

Now for the hard bit: Which of the two main options, “fiscally responsible” or “growth oriented” is better?

If you think that production, trade, and consumption is a zero sum cycle then you want to take the fiscally responsible card and trade less. Everyone should consume within their means. For example if the economy is mostly bound by natural resources that’s the right approach, at least for preserving the resources.

If you think the economic flow of production, trade, and consumption has a net positive value on the human beings involved, just by virtue of the economic activity taking place, then you want to take the growth oriented card to maximize it. In a world where the economy is overwhelmingly made by people, and participation in the economy is plainly of vital importance to all, the sane option is to pursue growth and connection through trade, rather than parsimony.

The relationship between Africa and the post-colonial developed world, tragically, has taken the “trade less” route. Perhaps this is because the West thought of Africa as a region of natural resources. When the west quit taking Africans as slaves, we were only interested in logging and mining.

Pretty much everywhere else, especially in Asia, people-oriented economies have flourished. These economies produce and trade as much as possible and forget about balance of payments, or at least it’s a distant second in their considerations. Japan used to have a huge surplus with the US. Now China, Korea, and Taiwan have huge surpluses with the West. The net flow of value from Asia towards the West is much higher than the cash trade imbalance (in the other direction) suggests, because the productive countries of Asia are still for the time being poorer per capita and because the West extracts rents through IP assets. Still, the effects of this vibrant economic production have been overwhelmingly beneficial for Asia, much more than cheap tablets and phones have been beneficial to us in the West.

In Europe, Germany and a few other countries generate a surplus of goods that the periphery absorbs. That’s really good for them. Unless the Germans want to cash in their productivity for leisure, which is unlikely, the best macroeconomic policy for the EU is to be growth oriented. To keep the predatory financial markets at bay, EU states need to use taxation and redistributive grants, rather than market finance, to recycle the funds from the rich center to the poor periphery and keep the engine of production running.

In the long run, any closed economy benefits from maximizing the production of value (assuming we count the full costs, and we don’t destroy the planet for short-term value) and that is best, or rather inevitably, achieved by maintaining a net flow of value from the more productive to the less productive economic participants. The flow of value gradually raises the productivity of all economic participants, including the slow ones, to a higher level.

In a closed economy, parsimony is ruinous. Only the few, richest people benefit from it, while the economy as a whole falls short of its achievable production and becomes less equitable, not more as an even balance of payments might naively suggest.

Related myths

Finally to debunk two myths: In the EU, trade imbalances are of a size modest enough to be financed through redistributive grants. Accumulated debt is one or two orders of magnitude higher. For example, Greece has a running deficit of about €8 bn a year. Accumulated debt is €340 bn. It’s reasonable to ask that the the EU tax the industrial center and subsidize the periphery for the good of overall growth. It’s not reasonable that they tax anyone (center or periphery) to pay off the mountains of debt.

The second myth is that Keynesian growth-oriented policies result in rampant inflation because the government “can’t afford” the money it’s spending. If fiscal stimulus causes inflation, the problem is monetary, not fiscal. If the monetary authority (the government) is too weakly integrated into the economy, for example because they’ve privatized all their assets and services, then when they come to print new money the market senses that the issuer of the money has no assets and effectively “runs” on the newly issued money. The market calls the government’s bluff on the monetary illusion. Keynesian growth economics work, but only with a large state sector, or some other tight coupling of the meonetary authority with the real economy.

• Total revenue: €128 billion
• Real revenues from taxes etc. €55 billion
• Aid from the EU €3 billion
• Borrowing from the market, including rollover €70 billion
• Total expenses: €128 billion
• Real expenses such as pensions, health etc. €63 billion
• Debt rollover and interest payments €65 billion

And another pair of interesting numbers

• Interest rate charged by the market for German bonds, 2 year maturity: 2%
• And for Greek bonds: Around 25%, rising

So, what does all this mean?

Real deficit

In summary the Greek state is like a business that takes in €55 bn in sales but pays €63 bn in salaries and what have you, so it makes a real loss of €8 bn, or 14%. To recover, the state needs to increase revenue by extracting more taxes or running profitable businesses, or it must cut the amount that it pays to the Greek people, or some combination thereof. If it doesn’t the Greek state will run bankrupt anyway, abruptly cut expenses to €55 bn, and go on living in a hand-to-mouth way.

That much is wrong with the real finances of the Greek state. It’s a combination of a long-running competitiveness problem (where the economy as a whole is not strong enough to yield high taxes) and a long-running management problem (where the state is failing to collect taxes, handle revenues, invest, etc. honestly and efficiently). Both are serious problems, but they’re not disastrous. On a global scale, losing €8 bn a year is not a big number. General Motors lost €3 bn in 2009. BP, with a turnover four times that of the Greek state, lost €12 billion in the spill incident. The bank bailouts came to trillions, with the US giving roughly €125 bn to AIG, for example. The Greek state at the time gave €28 bn to its private-sector banks. For perspective, the size of the Greek economy (GDP, not the state budget) is around €230 bn.

As it happens, Greece gets a grant of €3 bn from its parent, the EU, leaving it €5 bn in the red. If that much goodwill remains, the Greek state has to reduce its deficit by €5 bn on €55 bn a year, or 9%. This is not easy, but it’s feasible. There are certainly good and bad ways of doing it. One of the worst ways is to sell off assets, since that will divert annual revenues from state-owned firms to privately-owned firms. One of the best ways is to provide socially motivated services, such as transport, health, and even food at rock-bottom prices so that the cost of living in Greece falls and the population can tolerate lower income, as well as becoming more competitive. Currently the government is speeding along the wrong route and people are loudly complaining.

Financial speculation

Now, enter debt and the global financial markets. That is the bigger problem, and it’s about financial speculation against weak Eurozone countries. It’s not particularly about Greece.

Greece has accumulated some €340 bn in debt. This debt is borrowed from the private capital market, basically banks in Europe and elsewhere, and it’s in the form of bonds that have a fixed term, usually 2 to 5 years. That means the every year approximately a fifth of the debt comes due so Greece has to borrow new 5-year bonds to pay off the old 5-year bonds (capital plus interest). That’s how Greece ends up borrowing €70 bn a year, of which it pays €65 bn immediately to settle old debt and spends the other €5 bn on its deficit.

This “rollover” cycle is the norm, and would be no problem if interest rates were consistently low, as they normally are for states. The market normally gives rates around 1% to 2% to states, which is a bet that states will repay. That’s because of three factors:

• States usually keep up their payments.
• If states do decide to stop paying there’s little the banks can do about it.
• States normally issue their own currency, so they can run their internal economy even if they’re externally in default.

Not so with Greece. Since Greece is in the euro the Greek state is more like a loss-making business. When it runs out of euros it’ll have no more euros to pay Greek pensions, public sector salaries, etc. and people will be very, very angry. Thus the government is desperate to keep borrowing. To borrow the €5 bn it actually needs, it has to roll over €65 bn or so. Since it’s desperate, the market can charge it whatever interest it wants. Currently the market is charging 28%, an absolutely ridiculous, exorbitant rate of interest.

This is a bet that Greece will default, but not immediately. The bond speculators are betting that Greece will extract what it can from the Greeks (which is not much) but mainly that France, Germany and other rich EU countries will back up Greece with several billion from their budgets. The high interest rate is trying to predict when a default will happen and price in the risk, so that the speculator makes a profit before Greece defaults. Of course with each rollover at higher interest rate the debt becomes less and less likely to be sustainable, the interest spirals further to cover this new risk, and the cycle pretty much ensures a default. It’s as if you had a mortgage where each year the bank said “Hey, we think you’re a risky borrower, so we’ll crank up the interest on you”.

As to why France and Germany would prop up Greece, there is some goodwill but mostly it’s to protect their own banks. French and German banks, even while participating in the bet, have relatively low capital and would get into serious trouble if they lost the few tens of billions Greece owes them. Thus what we see is a speculative attack where the main parties are European and international banks on one side, and rich EU states and their taxpayers on the other. The banks are attacking Greece, as a hostage, and forcing states to either pay the ransom for Greece or bailout the banks.

Greece just happens to be the weakest economy in the Eurozone with debt and a deficit, and therefore the first victim. The fear that after Greece it will be Portugal and so on is in this sense accurate. However the implication that the Greek government’s poor fiscal management will spread out like a disease around the Mediterranean and beyond is false and misleading. State finances are fairly well contained. It’s market speculation and inadequately capitalized banks that threaten to spread the problem.

Commentators, especially in the English-speaking press, like to cite the crisis as evidence that the euro is vaguely and generally a bad idea. I sense some bias. The single currency makes the EU stronger and as such is essential for its global competitiveness. The Eurozone is also not properly integrated, and that allows the market to speculate against the weaker members. That is genuinely broken and needs fixing.

Financial solutions

The quick and easy solution to the problem of financial speculation is for someone to lend to Greece, or the next troubled Eurozone country, at very low rates – essentially below market. If a lender with bottomless pockets agreed to finance Greece at the normal 1%-2% for decades to come, the speculators would have to go away.

The simple and obvious lender to do this would be the ECB. As the issuer of the currency the ECB can absorb or delay any amount of nominal losses. If the ECB were set up to serve the political interests of Europe, the issue would have been resolved some time ago in this way. The fallout would have been mild devaluation of the euro, which would be a correct and useful adjustment in any case. Unfortunately, the ECB is set up to further the interests of European capital, and it’s prevented by its charter from lending to states directly. Instead it provides capital to banks, so that they can speculate on crises such as that of Greece and later get bailed out by their governments. The ECB is desperately in need of reform.

The latest French proposal is a mixed blessing. As far as I can tell, it rolls over short term Greek bonds into 30-year bonds, which will dampen down the cycle of speculation. It tries to achieve some voluntary settlement of the speculative bet rather than let it stack up until the bluff is called. All of that is good. On the other hand, the plan is pretty obviously designed to disentangle French banks from the mess, by floating off their Greek assets in a way that protects their balance sheets.

If the current proposal fails, the cycle of speculation is likely to accelerate until Greece defaults in some way. Disorderly default would mean not paying bonds when they come due. Debt would stay on the books but frozen, and Greece would be unable to borrow for a while. Depending on timing some speculators would make money and others not, while EU governments would have to bail out their banks. After several years, there would be some kind of settlement. Unlike a business, Greece would keep control of its affairs and isn’t going to be run by creditors, at least in the current legal framework. There are hawkish voices, mostly from the German and UK finance lobby, to change the legal framework so that states do go into receivership like companies.

There is no quick solution to the €8 bn real deficit of Greece. The Greek state can reduce and maybe even balance its own books, but there’s an underlying competitive difference between the Greek economy and that of Germany. In an open economy the German region will have a trade surplus and the Greek region a trade deficit. Currently, the Greek state borrows on behalf of the Greek people fo finance the difference. The extra €8 bn that the Greek state spends circulates, through private consumption of imported goods, to German, Dutch, and other EU firms – or at least much of it does; it’s hard to find bilateral balance of payments numbers. If the Greek state aggressively balances its books, as it’ll do if it defaults, Greek demand will shrink to a much lower equilibrium. Similar logic applies to Portugal and the other weak euro economies in relation to the industrial center.

For this reason, some form of redistribution from the more competitive to the less competitive states makes sense for the EU as a whole. In the case of Greece the €3 bn of aid from the EU is well spent and could be increased. A direct, tax-funded transfer is useful as a subsidy for demand. Productive investment in the periphery would be even better, as the goal is of course to narrow the competitive gap between western and peripheral Europe over time. The same happens in the US where the federal government both subsidizes and invests in the economically weaker states. Otherwise a combination of hardship, migration, protectionism, and other less attractive forces will eventually solve the competitive imbalance in a way that leaves the total size of the EU economy smaller.

Greece is unlikely to exit the euro as a result of this crisis. To do so would be pretty impractical. Banks would have to close for about two weeks to freeze euro deposits while the state prints new Drachmas. The Drachma would then suffer massive inflation. There’s no particular public sentiment against the euro or the EU, although everybody wants to see the EU reformed. Most likely if Greece defaults the state would issue some kind of limited IOU or in-kind coupon to cover its deficit, while continuing to use the euro as currency.

Politics and the people

Finally, about the sentiment of people in Greece. They’re obviously angry, but there are shades to it. Some are selfishly angry that they’re getting pay cuts and refuse to adjust to reality. For example they’d like the state to somehow keep paying high salaries or maintain obsolete jobs. Would the same people also favor protectionism, so that for example they could buy quality, cheap, local produce but no iPhones? Maybe. Especially among middle-aged and working-class people an appetite for common-sense protectionism exists. It’s justified, given their true prospects.

The greater number of people are angry because they perceive fairly accurately that Greece has been the victim of awful governance internally and financial speculation from outside. They see the prime minister as spineless or in the service of creditors, which mostly he is. Modern Greece has had lousy governance as a rule but current statesmanship is at a low point for both major parties. People are calling for direct democracy rather than elections.

The feeling toward creditors is that Greeks don’t want to suffer to pay French and German banks, especially when the banks are acting as loan sharks when it comes to rollover of debt. Greeks are especially unhappy about the government’s moves to sell assets such as ports, telecoms, etc. Asset sales will reduce the accumulated debt but damage Greece’s balance of payments and state deficit, as the profit from these businesses will go to foreign shareholders rather than the state. The people sense that it’s like selling your car to the loan shark to pay off part of your debt, but then having to pay them for transport.

Surrounding this there is a class and ethics conflict. Especially since the 1980s, Greece has had an economy that encouraged the middle class to participate in petty corruption: Tax evasion, informal employment, lax regulation, and the like have been the norm. Now that society is being squeezed the majority find they can no longer eat from that pie, which is now reserved for the upper middle and upper classes. They are not happy, and there are very forceful calls for cleaning up taxation and in general fighting corruption at high levels.

The political maturity of the Greek people has risen markedly due to recent events. There’s a sense of camaraderie and involvement in the commons not seen for decades. A continuous town meeting has been running in the central square of Athens, outside parliament, for some months now. They manage to organize expert panels, which come up with lucid analysis and demands such as for independent oversight of government fiances. An unofficial commission for fiscal control has formed to do just that. There’s serious discussion as to whether Greece should default, when, and in what way exactly. The will for better governance, as well as the skills for it, are definitely there.

So far, the movement is promising but not crisp enough. The main slogan is “we don’t owe, we won’t sell, we won’t pay”. The first part is unrealistic – it appeals to justice, which doesn’t apply here. Whatever poor governance or personal complicity got Greece here, Greeks owe. However it’s correct that they shouldn’t sell and would be better off refusing to pay now than being saddled with exorbitant debt and going bankrupt later. So far there’s no new political party or clear enough grass roots movement to take that message, evolve it, and make it into a governing mandate. I’m optimistic that that may emerge.

On the dark side, hate is on the rise. Greece has always had neo-fascists but they’re getting more visible and more bold. They show up as violent gangs with simplistic messages and symbolism and hold rallies, or try to pick fights with immigrants or perceived liberals.

The police has been enlarged several-fold, in spite of savings in every other part of government, and their expanded presence is repressive rather than related to crime fighting. They patrol on bikes or stand at street corners in riot gear reminding people to stay in line. The vast majority of the public take a mature, peaceful stance in their protests and sit-ins at the square, and the crowd usually contains or fends off violently disruptive small groups. On most days there is no confrontation. On important days, such as when finances are debated in parliament, the police strikes the demonstrators by using gratuitous amounts of tear gas and beating random people, sometimes severely. Escalating violence by police against ordinary people inflames anger, sometimes to the point of riots, and undermines what is left of the state’s legitimacy.

Selling is not like this. To sell is to convince someone of the value of a thing that you have, so that you can exchange it favorably. You have to have the thing, and it has to deliver the value readily by itself. Great selling acknowledges this. Buy a Mac, it can do these things out of the box. The cardinal sin of selling is to sell things that don’t deliver the value that is claimed. Drink Coke and you’ll feel happy. Really? That could only be honest selling for drugs. Otherwise it’s very uninspiring leadership. If you’re active and outgoing, do fun things with others, and also drink Coke, you’ll feel happiness.

If you worked at a startup company you’ve probably done some leading disguised as selling. You’ve probably sold some services that you barely knew how to fulfil, or a piece of software that didn’t quite exist. That can be OK. You, the founder, principal engineer, etc. are not just selling. You’re asking the customer to sponsor your leadership, so that you can deliver them great value. If the customer understands the relationship, and you have the authority to lead your organization to deliver, your’e doing good. If much later you hire a VP of sales who tries to do the same, they’re misleading the customer. They’re expected to sell things that are real, and they’re not in a position to lead to create new things. In fact at the point that you hire professional sales you signal to your customers, rightly or wrongly, that you’ve moved from the visionary partner stage to the mature supplier stage.

There’s still leading for a mature company to do, but it happens at a level distinct from sales. Buy our service and it’ll keep getting better (otherwise we’ll run out of money and it’ll wither). You have to lead with the brand or the product line but sell real products to individual customers. Great companies get this right. Small companies and open source projects tend to be good at the leading part but often fail at having finished products to sell, free or otherwise. Large industrial companies often produce a steady stream of products but fail to inspire or lead.

Managers in a firm decide on risk and as such are either leading or selling within the organization. For a new venture, the honest thing is to lead. Leaders are asking the organization to sponsor the costly activity, and if there is buy-in, competent execution, good foresight, etc. then success is merely likely. Success is not assured, so it cannot be honestly sold. Someone who takes over a running business unit or department is selling. The company has a thing of value, and has to transfer some of this value to consumers in exchange for money. The blue-chip manager is therefore selling to the investors and other stakeholders the ability to convert this value to revenue. The two management mandates are radically different, and different people generally need to be appointed on either side of the transition.

The asset bubble that started in the late 1990s and exploded in 2007 as the financial crisis was caused, in my opinion, by our monetary system. In particular, the following cycle took place:

1. The general public in western, mainly Anglo-Saxon, economies started using real estate as hard money, profiting from its parasitic appreciation linked to GDP growth. The real economy deflated against housing.
2. Banks issued new money backed by the rising real estate. This broke monetary policy by expanding the money supply first as intended but then beyond, as banks used securitized debt to evade regulation and recycle their license to create money and use it as their capital.
3. A positive feedback loop developed, where appreciating houses led to banks issuing more money, which led to inflation of money against housing. The market responded by raising house prices further, until both housing and housing-backed money crashed.

The system of money used by western economies, although no secret, is not widely understood by the public. I’ll explain how our monetary system works, how it caused the crisis, and how it ought to be reformed in principle. Obviously I have no tried and tested new system to propose, but I’ll try to articulate what new conditions it should meet.

Hard money and its parasitic appreciation on GDP

The traditional conception of money is as a fixed quantity, such as a ton of gold. It changes hands, and some people hoard it, but it doesn’t grow or shrink. That way the value of goods can settle against gold through the market. This “hard money” concept served well for most of history because the size of the real economy didn’t change much either. In a static economy, a gold coin buys a sack of wheat, say, now or in a hundred years. Using gold does nothing to erode inequality, but doesn’t amplify it either. Sitting on gold yields zero return, so any productive investment whose risk-adjusted real return is above zero beats that, and will probably get funded.

Since the industrial revolution, we have economies that grow rapidly in real terms. If people use gold or other hard money in such an economy a systemic effect results that amplifies inequality and denies production that ought to be funded. It works as follows: Say the real economy GDP, measuring total wheat produced etc, grows by 5% a year but the money supply is still a ton of gold. That means that sitting on a gold coin for a year buys a sack and 5% more wheat, so anyone who holds excess gold will tend to do that. The person sitting on gold didn’t do anything useful, so we can say that hard money has a parasitic appreciation linked to GDP, or that the real economy suffers deflation against the currency gold.

Deflation amplifies inequality, as anyone who hoards say 1/10th of the total gold is entitled to 1/10th of total production, which is an ever growing amount of stuff. That’s ethically bad, but not the focus of this analysis. The more practical problem is that any productive investment, say a mill, needs to yield more than 5% risk-adjusted return, or above GDP growth, to beat the parasitic gain and get funded. Investments can’t beat GDP growth on average, by definition. Something like 5% GDP growth is the aggregate result of many investments with different individual returns such as 1%, 6%, -3%, 5%, 10%, -7%, 2% etc. All those with positive return ought to get funded, but capital is motivated to fund only those above 5% return and pull out of the others. That results in violent fluctuations of real economic output and can stall overall growth.

Western economies eventually figured out this problem and abandoned gold as a result of the Great Depression of the 1930s. But then they needed a new currency to replace gold. The abstract properties of a currency for a growing economy ought to be that the money supply grows to match the real economy in aggregate, and preferably that the influx of currency gets to the hands of the people who make the growth happen (growing industries, young people entering the workforce, etc) to reward them. Unfortunately, there is no handy metal or other physical commodity with these properties, so artificial currencies were set up.

The role of banks in the monetary system

The money we use today looks to the consumer like state-issued currency but it is in fact a hybrid. Roughly 10% is issued by states (central banks) and 90% is issued by private banks. The kind that’s printed on colored paper and says €20, or $20, or whatever is issued by states. It’s printed by central banks, which states can in theory put under democratic control. Increasingly they don’t – they allow the central banks, notably the ECB, to serve the interests of business rather than the public, and again that’s bad but not central to this analysis. The independent central banks and their allegiance to business is a contributing factor, not the cause, of the crisis.

The depth of the problem is with the 90% or so of money that’s issued by private banks. That’s your average high street banks. They issue 90% or more of money, even if they don’t have some archaic right to print paper banknotes (bills) like they do in a few places. That bulk of the money supply is not paper money. It’s the numbers that you, other people, and regular businesses see in your bank account. The money in your bank account, even though nominally euros, dollars, etc, is not issued by the state and stored by the bank. It’s money issued by the bank. Strictly speaking it’s not issued by that specific bank you’re the customer of, but it’s issued by all the private banks working as a system.

The process is as follows. Say you want to buy a house that’s newly built and worth €100k. You go to the bank and say “Hey, can I have €100k? I’ll take a mortgage on that house”. The bank says “Sure, there you are, you have €100k. You owe us €100k plus interest, and if you don’t pay we’ll take the house”. At this point all that the bank has done is write on one side of its books that it promises to pay you €100k whenever you ask. That’s money freshly created by the bank, and you see it as a positive number in your account. On the other side of its books the bank writes it has an asset: Either regular payments or €100k plus interest from you over many years, or a house worth €100k. The bank is allowed to create money in this way because the entries are balanced. The sum is zero or in the bank’s favor, so the bank will in theory be able to make its promises to pay. That one bank will actually have to pay you the €100k when you withdraw it to give it to the house builders but they’ll immediately put it in a bank account in the same or another bank. The transfers of money between banks balance out so that banks only need a small amount of paper money, issued by the government, to cover cash withdrawals or other transactions that leave the banking system. Thus banks create and then maintain the bulk of money as nothing but entries in their books.

Banks are granted special legal rights, not available to regular businesses or individuals, so that they can implement this privately run monetary system. So long as it meets certain accounting metrics, a bank is allowed to issue money by simply declaring a promise to pay someone. It can’t print it on paper notes payable to “the bearer”, but it can hold it as an account payable to a specific person. Credit in the account is legal tender because the law treats IOUs from banks as money. It’s money in substance because the bank can pressure the people who owe it loans to pay their dues, or take their property and sell it. It’s practical money because the bank nowadays provides a fast electronic payment system that moves credit between different people’s accounts across the banking system. So the money that we use now is roughly 10% old-fashioned state currency and 90% or more privately issued credit backed by the general public’s debt obligations or property in mortgage.

The reason for the 10%/90% hybrid is to allow the state to regulate monetary policy. Taking the US as example, there is roughly $10 trillion in total, but the Fed only issues about $1 trillion. US law allows banks to store a dollar of Fed-issued currency as reserve and issue ten dollars of their own money, so that the amount issued by the Fed and that 10x legal multiplied determines the total amount of dollars. Say the Fed measures that US GDP has grown by 2%. That means it must increase the overall supply of dollars by 2% to avoid deflation, so it has to print an extra $20 billion. The Fed lends this currency to banks, which store it and are therefore allowed to issue an extra $200 billion of their own money. The money supply grows by 2% as intended by policy, while it’s up to the banks to find customers with credible assets or income and convince them to take loans to back the $200 billion that they issue.

This system is an ingenious attempt to avoid the problem of deflation caused by using gold, or other hard money in a growing real economy. Mostly it works, and there is no superior system widely proposed. That said, let us enumerate its shortcomings:

• The system motivates banks to enlarge the money supply as much as possible since more loans directly relate to more intrest revenue. There is a conflict between banks’ profits and the monetary policy they are licensed to implement, and that is the main problem that led to the present crisis.
• Banks should ideally give the new money to people and businesses who promote real GDP growth, such as investing in R&D or job creation. It doesn’t fulfil policy goals if the new money joins existing idle capital. That is a major contributor to the crisis.
• The system grants a license to banks, as providers of the monetary system, to obtain essentially free capital which they convert to loans and charge interest on. That is a public asset that enriches the banks substantially, perhaps more than any of their other business assets and services. Arguably it has not been granted to banks transparently by the public will, and the public is not being adequately compensated.
• Because there is no separation of the bank as an operating business and the monetary fund that it runs, the economy is hostage to the banks. Any political will to hold the banks accountable, or any fanciful idea to blow them up, cannot proceed because if anything bad happens to the banks the money that they issue as IOUs disappears. That is archaic and should be straightforwardly fixed by separating the bank’s operating balance sheet (its offices, staff costs, etc) from its trust balance sheet (the loans and deposits that it runs). The proponents of narrow banking advocate this change, and I agree, even though neither of us I think wants to blow up banks.
• For the same reason, even if anything accidental happens to the banks they can pass the harm onto the public, which forces government to provide free unlimited insurance for their activities. This is the part of a crisis that most enrages the public, although it’s not the most harmful part. Even in a healthy monetary and banking system, there needs to be deposit insurance. Banks have to pay for insurance against their individual failures, as some fairly mainstream reformers of the system argue. The monetary system needs to be resilient, rather than insured, against their systemic failures.

Let’s look now at how the monetary and banking system went wrong, starting in the 1990s and into the present crisis.

Deflation of the real economy against housing

Housing can be viewed as a commodity that provides living comfort, as a capital good, or as a token asset held for its exchange value. We regard hotel accommodation as a commodity – we rent it and care about the quality of service offered. Through much of history, housing and farmland have been viewed as productive capital goods. Buildings depreciate through wear, like cars. Farms have value because they directly support production, like machinery, and some have better output than others. Feudal land holding was an especially unequal distribution of land seen as a means of production, not as a token of value. These approaches to land are economically sane.

More recently, especially in Anglo-Saxon cultures, the general public has been using housing as a token of value. House ownership makes the greater part of people’s net worth, even though their earnings are made at an office or workplace outside the house. The public delights when house prices go up, even though this makes living unaffordable. Houses are bought and sold as investments, not as devices that improve quality of life. What is being traded are licenses to live in or occupy a particular location. The building is not the important part, and often the quality and comfort of houses is sub-par where the focus on real estate as investment is strongest.

We’re using houses as large gold coins. Housing has acquired the same economic characteristics that gold had in until the 1930s:

• It is compelling. Housing is accepted universally as a token of value, and normally the market clears. People and businesses have to buy up the available urban and suburban buildings because they compete for location, and if they don’t someone will buy the titles for redevelopment. The effect is that the real economy (or the great majority of it, which is driven by city dwellers) gets priced against housing.
• It is practically in fixed supply. Although cities and suburbs can sprawl, real estate doesn’t grow or shrink significantly because the high-value part is concentrated in city centers or other small desirable locations with inflexible building rules. Since the growing economy gets priced against housing which is fixed, housing appreciates parasitically on GDP growth.
• Any particular unit retains its value indefinitely as an asset. Even if buildings crumble, titles of land holding are effectively eternal, like gold.
• Real estate, or the right to claim it as security, is held by banks as a tangible asset to back the issue of the formal currency that we use.

The result is that real estate titles start functioning like money. They take a nominal value that far exceeds their real use value, and the difference is a reflection of the value of the real economy.

Perhaps it should be no surprise that real estate is causing the same problems that gold used to. It appreciates parasitically on GDP growth. In the macro, housing appreciates because the participants in the growing real economy compete to buy up and hold the fixed supply of housing. In the micro, an appartment’s value rises because of the good work of teachers, cooks, shopkeepers, or entertainers in the city – not because of the activities of the builder or the owner. This promotes inequality as older people who have invested in housing earlier become disproportionately wealthy compared to the working young.

Because real estate appreciation will at least match GDP growth, housing beats any average or below average real investments and deprives them of the capital that ought to fund them if returns were unbiased. This in turn slows down the economy, as only the minority of high yielding investments go forward. Tech startups happen, but bakeries do not as people put their savings in houses instead. The real economy deflates, not against gold this time but against real estate.

Breaking monetary policy

As we’ve seen, the central bank regularly measures GDP growth and tries to expand the money supply by an equivalent amount, so that there is near zero inflation. Falling slightly short causes deflation, which is hard to control, so the policy aim is small positive inflation. Continuing with the US example, let’s say the money supply needs to grow by 2%. There’s roughly $10 trillion in existence, so a fresh $200 billion has to enter the economy. If every dollar were issued by the Fed, the Fed would have to print all $200 billion and hand it out essentially free to some actors in the real economy, preferably in such a way as to reward growth. It could give the money to the federal budget (the treasury) or it could have a large grant-giving agency to decide who and what to fund. Such a system might be seen in smaller economies.

Instead, the US, EU, and other large capitalist currencies have a privatized money supply. Banks maintain a balance sheet where their IOUs (current/checking accounts) are our money supply and their receivable loans, or claims to property under mortgage, are the assets that back the money. Banks are motivated to enlarge their balance sheet infinitely, since the more loans they can issue the greater their profits from interest. They’re limited by business risk, where the risk-adjusted return from loans becomes lower than the interest banks pay out to consumer accounts (or zero), and by accounting metrics imposed legally. Plenty has been written on the banks’ tendency to under-price risk, but here let’s focus on the legal limits, as these exist to constrain the banks to implement monetary policy.

Banks have to meet a solvency constraint, which means that the credible expected return from loans, or from taking and selling mortgaged houses, must be higher than the IOUs that the banks have issued as our money. This is obvious enough – otherwise banks would use their license to issue money to directly line their pockets. Instead this constraint says they’re only allowed to create money as free capital, use in sound investments, and keep the profits. Banks also have to meet a reserve constraint, which is to hold state-issued currency equal to a certain fraction of their balance sheet – usually 10%. This is the control that the central bank has to regulate how much money the banks can issue. The bank has a license to generate free capital, but only so much (ten times as much as its holding of state currency). When properly applied these controls allow bank to implement monetary policy safely and as intended, while profiting from the returns on good loans they issue.

The system goes wrong when banks subvert these measures in order to expand their balance sheet more than intended in pursuit of more profits through interest. They subvert the solvency constraint simply by lending larger sums to poorer people with less secure jobs. Lending to poor or insecure borrowers is not in itself a bad thing. It can be good if done constructively, but the risk must be correctly reflected in the value of the loan. It’s always a matter of judgment whether the borrower will repay the loan, and how much of it. By being optimistic, negligent, or duplicitous the banks have over-represented the value of their loan assets and passed the solvency bar, where objectively they would have fallen short. That much is straightforward bad practice.

More interestingly, banks subverted the reserve requirement, and hence the limit on how much free capital they can issue, through securitized debt: CDOs and other such instruments. Remember that the requirements is “you must hold $1 for every $10 on the outgoing (liabilities) side of your balance sheet”. If a bank has $10 million of federal currency it can have $100 million in liabilities such as consumer accounts, and let’s say it’s also solvent and records $130 million in receivable loans including interest. If the bank can chop off, say $20 million of its liabilities and $26 million of its receivables and sell it off as a completely unregulated free-floating entity, it’s left with $10 million of Fed currency and $80 million of its own issue. It’s then allowed to re-use its license to free capital to issue a fresh $20 million, so long as it can find consumers to sign up for loans of that amount.

A Collateralized Debt Obligation (CDO) is just that free-floating unregulated iceberg broken off from a bank’s balance sheet. You can also think of a CDO as an unregulated micro-currency. Banks have a highly regulated license to issue their home currency (dollars, euros, etc) as we’ve seen. They cannot print Citi dollars or RBS pounds outright, but with CDOs they can do something equivalent. The CDOs are identified with boring names and numbers, and they’re sold to other banks, pension funds, and other institutions rather than directly to consumers, but otherwise they’re like money. They’re traded in a liquid way, or they were until the market collapsed in 2007, they’re held as liquid assets by investors, and their value goes up and down based on broad perceptions of the market, like the value of currencies (and less like the value of shares, where the individual performance of the company matters).

From the 1990s, banks have enthusiastically used this device to break off pieces of their balance sheet, abuse their license to issue money, effectively enlarge their balance sheets beyond the permitted amount, and profit. They also in practice picked the riskiest assets to break off and sell to fools (as Stigitz describes them) so that they kept the healthier balance sheet and the fools got the risk. Again, that’s ethically bad but the main issue is that banks broke monetary policy. Even if they had sold off the most prime assets, we’d have the same problems. The damage was done over 15 years or more, as banks have been breaking their reserve constraint. It suddenly emerged as a crisis in 2007 when these free-floating assets started sinking and banks started failing their solvency constraints too.

When the crisis did break out in late 2007 the main difficulties were legal, not substantial. The rules of capitalist banking systems were designed with the assumption that a few banks might fail individually, for their own business reasons. Thus the rules require that insolvent banks be immediately liquidated, to keep the banking system healthy. The new situation was that nearly all banks were insolvent by a small percentage, so in theory the banks should have been liquidated en masse. We couldn’t do that because if we did the money that exists as IOUs from these banks would disappear, and there would be economic chaos.

Our mediaeval (literally) banking system makes money, and thus the economy, hostage to the banks. Under the circumstances, states had no choice but to keep banks afloat, and they way they chose to do it was to take on the insolvency of the banks as state insolvency. Where CDOs or other toxic assets were involved, the sate effectively issued currency to take in and cancel the failed private micro-currency of the bank. States are now dealing with this insolvency, mostly by imposing austerity to re-claim the loss from the real economy. As I argued in the previous article, a policy that reclaims the loss by eroding capital, such as inflation, would be far preferable.

Feedback, leading to asset inflation

These problems would not have got so far out of hand if each of them had acted in isolation. They are all self-limiting in some way. If house prices appreciated but the money supply would not grow as much as it did, credit would run out and house prices would stop rising. If banks attempted to abuse their money-issuing license but house prices were not rising then there would be no demand for speculative mortgage loans and banks would stop producing excess capital, or they would lend it instead to productive firms. The tragedy is that these effects have been allowed to reinforce each other, with no mechanism to detect or stop the cycle.

Recall the example where you ask the bank for €100k for a newly constructed house. You get a mortgage, which creates new money that makes its way to the house builders. That’s money supply expansion that rewards production, as per the policy intent. In two years, though, the economy has grown by 5%  a year so the house is worth at least €110k. Someone else gets a mortgage and offers you €110k on the same house, of which €100k was circulated in the banking system and €10k was freshly issued. That €10k is money supply expansion funding parasitic gain to you, rather than anything productive.

More worryingly, the €10k has entered the money supply more than once. It was first issued as bank money, that is IOUs backed by consumer debt, as intended. However it was then used to buy housing, which we have seen functions as hard money. The bank has used the extra €10k of housing value either to issue fresh currency or, if the reserve limit was in the way, to issue a CDO to get round it. Other banks and institutions would have taken the CDO as an asset. We have therefore roughly three kinds of money-like assets: nominal money (dollars, euros, pounds, etc), real estate titles manifest as mortgages, and CDOs with all their variants. Nominal money is backed by the other two kinds, which is a very big problem.

It is as if, back in the 1930s, the Bank of England had issued paper pounds to reflect the market value (in pounds) of gold in its vaults but also permitted the use of gold as legal tender. If they did such a thing a positive feedback loop would quickly result in high inflation. Neither gold nor nicely printed paper have that much intrinsic value. They are money, which means they’re supposed to represent the value of the real economy. If you have several kinds of money you cannot issue one kind to represent the value of another kind unless you take the second kind out of circulation and keep it all in a vault, or otherwise make it an illiquid asset.

The modern banking system was guilty of just such an egregious double-accounting scheme. It issued money against real estate market value and real estate market value packaged up as CDOs, while cheerfully letting these assets appreciate by reflecting the growth of the real economy. The total money supply (counting money, real estate, and securitized debt) expanded at roughly twice the rate it ought to, and the banks, as well as housing speculators, profited from this inflation.

Reforming the financial system

A substantial reform of the financial system has to look back and ensure the following principles:

The banks as operating businesses need to be separated from the monetary fund that they run. There needs to be a simple operating balance sheet for the bank’s buildings, staff costs, and everything else it directly owns or owes like any other business. There needs to be a separate fund for the money that the bank issues and the loans or other receivables it holds as assets. That is one aspect of the narrow banking proposal. The point is to allow banks to fail as businesses while keeping intact the slice of the monetary system that they run. If a bank failed its operating balance sheet would be liquidated, like any other business, while the fund would be transferred to a more competent bank or caretaker organization to manage. In cases of systemic insolvency the state could bail out the fund, but not the bank, and the bank would not be able to take the bailout money to pay executive bonuses. The two are inseparable now, and by far the most urgent and effective measure is to separate them.

While we use a system of money backed by consumer and small business debt, both bank capitalization and bankruptcy need to be handled in a better way. There are already capital requirements for banks, similar to the reserve requirements we talked about. Firstly, these need to be high enough to absorb foreseeable losses. Let’s say a bank with $100 million in liabilities may be required to have $10 million of Federal Reserve currency and another $10 million of regular capital. Assuming the bank’s operations and the fund that it runs get separated, when the fund is insolvent the bank must be made to cover the loss using its capital. If the capital runs out that would generally bring down the bank as a business (unless it’s a holding company with other sizeable activities), the managers would get laid off, and investors who bought the banks shares in the stock market would lose their money as per the normal rules of capitalism. If the fund is still insolvent after the bank is liquidated, then deposit insurance would be claimed. If that is still not sufficient, because the loss is systemic or the bank in question is too big, then the losses need to be passed on to the public. With a properly separated fund, this can be done in an orderly and legally pre-arranged way. For example a state, or larger body such as the EU, can decide to pass a certain portion of the loss onto the customers of the bank (perhaps zero) and socialize the rest. Socializing the loss means printing money to cover the nominal insolvency of the money fund, so that the loss becomes inflation.

In addition to reforming the banks as such, housing has to lose its incompatible status as both hard money and an asset to back the issue of bank money. One way, favorable to the Left, would be to dampen down the real estate market significantly with taxation on transfers, nationalization, and other controls, so that housing is once again seen as commodity or a capital good and not as a store of value. This would be acceptable in some cultures much more than others. For the Western, Right-leaning economies banks can instead be regulated to disallow the use of housing as an asset to guarantee the issue of new money. Banks would be able to generate money as before and issue loans for any kind of productive activity, including construction or renting, but not for the purchase of real estate. They would have to raise regular capital from the investment market if they want to sell mortgages. The effect would be to greatly reduce the amount of capital available to buy housing and to cut the cycle of housing appreciation and inflation.

The legal license of banks to issue their own capital, embodied in the 10% reserve requirement, needs to be recognized as a public asset of very high value and rented, not given freely, to the banks. The narrow banking people would withdraw it altogether, but I have doubts whether the market would provide adequate and cheap capital in that case. In my opinion the facility needs to be properly priced, so that some of the benefit accrues to the state and can be used to fund deposit insurance or other public goods. The license of banks to issue capital also has to be properly policed. If banks once again use instruments like CDOs to break off pieces of their balance scheet they would have to pay back the corresponding reserve, so that CDOs can no longer be used to evade monetary policy (they do have other legitimate uses).

Reforming money

In the long run, society has to consider whether a monetary system based on consumer debt, mediated through private lenders, is a good idea. On the plus side it’s a de-centralized system where many banks, rather than a central agency, have to find customers for loans. As a market system it has a better chance to cope with complexity and identify productive recipients for investment. Like any capitalist system, it pays a known and somewhat controlled fraction of its turnover to self-interest, as profit, rather than losing an unknown and uncontrolled fraction of its turnover to self interest through corruption.

Other than that, in general, debt is bad. There are only two valid reasons to take it. One is to recover from short-term financial stress. The other is to pursue a productive investment which you could not pursue simply by saving. If the financial system were perfectly efficient, meaning very low capital costs, negligible profit for banks, and no asset appreciation other than through the direct productivity of said assets, then a monetary system like ours would be a fantastic idea. Money would be issued in line with the expansion of the real economy, and the new money would go to those who make the world productive.

We’re very far from this ideal. Banks are monopolistic rent-seeking organizations rather than efficient providers of an infrastructure for allocating capital. The cost of capital is too high, partly because of bank greed and partly because asset appreciation is allowed to compete with real returns. The result is a financial system that only works well, if at all, for short-term debt. It’s neither efficient nor structured correctly for finance that extends over decades. Thus debt, the way it exists today, is not a suitable commodity to back our monetary system.

A new monetary system that ties the issue of money to real production must be found. I don’t know what that would look like. Indeed inventing it would be a momentous task. Most likely, monetary expansion needs to be coupled to human life. As an idealistic example example, every person could issue a “note of gratitude” (NOG) per day in their life and use it to pay for goods and services. Money expansion would thus be egalitarian, and people could still get rich by having a successful business that accumulates NOGs, pays them as dividends, etc. Old NOGs should relatively depreciate, which agrees with our intuitive concept of gratitude and allows the money supply to be tuned to size. Such as system would be computationally complex, but probably within reach.

A more pragmatic idea might be to adapt existing systems such that monetary expansion is, as far as possible, permitted only for real growth and disallowed for asset appreciation. If someone builds a house or a bakery, this is value creation and can be financed with newly printed money. If the same building appreciates next year, without actually improving, it’s asset appreciation. It should be legal to finance asset appreciation only by transfer of money, in a zero-sum way, so that some assets can appreciate in relation to other assets to reflect their true desirability. It should be illegal for banks to use their money creation abilities to finance the appreciation of assets in aggregate.

I wonder if it might be possible to connect money creation to value-add creation. Assuming we have a means to measure value-add, as distinct from asset appreciation, then perhaps the money supply could be expanded through VAT (value-add tax) rebates. When a chain of production takes place, businesses generally transfer value tax-free down the chain and the eventual consumers pay the value-add tax for the sum of everyone’s value increments. If this is a fairly accurate and equitable measure of value creation, the monetary authority can expand the money supply by rebating the appropriate fraction of value-add, either to the consumers or to the producers.

Key references

This article was composed over several years, with many false starts, and much of my reading material was from news and other ephemeral sources that I did not record as references. However a few sources stand out:

The intermediate-level textbook The Economics of Money Banking and Financial Markets gives a quality, if lengthy, explanation of how the banking system actually works.

The Wikipedia entries on the money supply and fractional reserve banking are very well written. These and related articles give a good working explanation of the concept of money creation by banks. Money issued by the state is called M0, and money issued by banks is called M1, M2, etc. In this article I’m complaining about M1, M2, etc.

Nobel-winning, ex-IMF,  left-liberal economist Joseph Stiglitz has lectured and written extensively on the crisis. You can listen to his talk or read his book Freefall.

Young, British, very left-liberal economist and journalist Philippe Legrain gives a refreshing and uncompromising account of the crisis and looks deeper into the systemic problems of the economy that led to it, like I try to do here. Listen to his LSE talk (card, audio, video), or read his book Aftershock.

US economist Laurence Kotlikoff is a very articulate proponent of narrow banking. I agree with some of his key ideas, although not with his overall stance on economics or politics, as far as I can determine. He has a blog, or you can listen to his LSE lecture (card, audio) or buy his book oddly titled Jimmy Stewart is dead.

Finance geeks may take an interest in the website of the Bank of International Settlements, a bank where central banks bank. It contains statistics about the financial positions of the banking systems of different countries, as well as some policy statements.

While not directly related to this topic, the forum VoxEU.org has many scholarly but accessible and politically interesting articles on modern economic issues. It is mostly left leaning, but also hosts some liberal or right-leaning articles.

The forum Project-Syndicate.org also makes interesting reading, though it’s mostly center-right and editorial rather than academic.

Finally the NPR programme Planet Money introduces many issues about the workings of the economy, and of course the crisis, in a rigorous but surprisingly fun and accessible manner.

• Phase One: Creation of false assets by private speculators, mostly banks and individuals who play the property market. These assets have a nominal value way in excess of their real earnings potential, and that gap is hidden.
• Phase Two: Transfer of the deficit of those assets to state budgets under emergency conditions. Private insolvency becomes state liability, while the gap between nominal and real wealth remains open and is now visible.
• Phase Three: Closing of the gap by a transfer of real funds from the public to states. This is achieved by means such as austerity, taxation, default, or inflation. These different options hurt or benefit different groups.

We’re in phase three, and the reason we have austerity in most of the West is that austerity is the method capital wants to see used to resolve the gap. Using austerity in this phase serves to consolidate the gains that speculators made in phase one, such that the whole cycle is a net transfer of funds from the general public to the speculators. Austerity is the “hard money” way to finish the cycle.

Using inflation (by printing money), taxation of capital gains, or controlled default would allow the gap to close by eroding rather than consolidating the false gains made in phase one. These options wouldn’t be clean but they would be fairer and less destructive of the real economy. These options are very unfriendly to capital, so they’re mostly absent from politics. The US Fed is using a small amount of inflation, presumably to reduce damage to the real economy, while the fabulously independent European Central Bank insists on a hard Euro and austerity. The ECB is working as intended, since the whole point of an independent central bank is to avoid stealth taxation of capital in situations like this. On the whole, current monetary policy is strongly in favor of wealth and against social cohesion or development.

The whole crisis cycle lasts many years. This one started in the late ’90s and will probably go on to the late ’10s. Furthermore the economy is always in such a crisis cycle. We had similar cycles immediately before, although they were smaller, and we’ll probably have another one starting in the ’20s unless there is reform or other major change. The economy is not in a state of normal development broken by sudden, unpredictable, short crises. Rather, the economy is constantly in a dysfunctional state of crisis in three phases. The period when everything is supposedly going well is phase one, where false assets are created. Phase two is the so-called crisis that seems to take everyone by surprise, and phase three is the bitter time when people are made to pay and the economy is weak.

Although the events of phase two can be quite spectacular, and the economic dislocation that it involves does some damage to the real economy, that phase is not especially destructive. It’s mostly a transfer of nominal debt from banks to states – vast but not directly impactful – and a period of unease because the insolvency of various assets is visible. The real destruction to the economy and society happens in phase three, now, if austerity and hard money policies are pursued. Further, it is arguable that the massive transfer of wealth from the many to the very rich that the whole cycle effects is itself greatly destructive to the prosperity of society. That argument is based on the assumption that a very top-heavy distribution of wealth is likely to result in waste, through further speculation or excessive consumption, rather than in productive, sustainable, or equitable activities.

I think that this three-phase cycle that happens to transfer vast wealth from the public to the very rich isn’t accidental or unknown to the those who benefit. To put it bluntly, I think it’s the result of vested interest. Phase one of the cycle, if it were to keep going, would be an ever-growing bubble. We would call it an investment fraud if any one person or small group were behind it. As it is the bubble is engineered by the whole banking industry and very few bankers are likely to be guilty of something, in each case a technicality. But phase one obviously could not continue indefinitely. At some point the gap between the nominal and the real value of assets would be too great and some assert holder, deserving or otherwise, would be revealed as bankrupt. The innovation, and it is a brilliant one, is to use phases two and three to make a complete, repeatable, cycle of wealth concentration.

That doesn’t require bankers to conspire, but only to meet (openly) and coordinate the implementation of monetary policy in the interests of themselves and financial elites, as they do. The workings of the banking system are boring, but they’re not mysterious. In summary, modern banking is a privately run monetary system where multiple providers (the banks) implement a common currency. The main function of banks is not to store money and facilitate payments, nor to mediate between savers and productive investors. Their main function is to implement the monetary system. Central banks set monetary policy but commercial banks implement it. It’s been privatized, and banks get a large share of their revenue through providing that service. I think this role of banks is inappropriate. In the next article I’ll attempt to show how it brings about a systemic conflict of interest, which leads directly to the crisis. The role of banks in the monetary system is, I think, the core of the problem.

Proposed remedies to “the crisis” tend to consider only phase two. The overwhelming majority, including all the “stress test” and “too big to fail” discussions, simply aim to make phase two more orderly at a technical level. These measures would reduce incidental damage due to short-term loss of market confidence or collapse of institutions during phase two, but wouldn’t affect the big picture of the crisis cycle. They are very friendly to the status quo. A handful of economists would attack phase two more substantially. They propose various measures such as “narrow banking” or a return to the gold standard that would stop dead the cycle at phase two. I’m sympathetic, but I agree with the majority of economists who think that these approaches also prevent an effective growth-oriented monetary policy. Finally, a good fraction of mainstream economists on the left side of the spectrum, including Stiglitz and Krugman, attack the third phase. They say, in one way or another, that we need inflation or taxes and spending instead of austerity, so that the gap isn’t paid up by the poor and the cycle closes more equitably. I agree. I think they’re not making enough noise.

In my opinion, the proper way to attack the crisis cycle is at phase one, such that false assets are not created in the first place, or at least so that it’s not systemically profitable to do so. In the next article I’ll attempt to show where the fix ought to be directed, but I don’t have a fix. The problem is hard. Banks, when they work well, implement a growth-oriented monetary policy. When they go bad they use the same mechanism to create bubbles and profit from them. We need to allow the former without the possibility of the latter. As far as I know, no-one knows how.

The alternative view of democracy, now prevalent de facto, is the democracy of the management firm. The state is governed like a large public firm. Political parties are management consultancies bidding for contracts to run the firm for a number of years. Elections are the general meeting, where citizens vote one share but large investors (businesses) vote according to their share of the economy. The role of the media, if it’s not the firm’s own newsletter, is to carry advertising. In this kind of democracy, the management firm, once hired, is allowed and expected to work behind closed doors. Their performance is judged only by aggregates, such as economic growth. Citizens are certainly not routinely informed, and have no say unless some investor lobby (large business interest) feels that the management performs poorly and calls for an early general meeting. If that is the democracy we have, WikiLeaks is wholly irresponsible and out of place.

Which type of democracy do you think we should have?

North Korea’s time
The United States, while making noises about Swedish whistle blowers and Iranian nuclear scientists, is sending an aircraft carrier group to North Korea to prepare for the possible start of World War III. Would it come to that? I think unlikely, but only thanks to the enlightened patronage of China. Clearly, North Korea is a primitive barking dog dictatorship, and it’s up to Beijing to support or let go of the regime there. So far, supporting Pyongyang has cost China little. They were a convenient headache to South Korean and Japanese growth and prosperity, and not much else. Now, they’re overstepping their provincial limits. China has so far expressed displeasure at US attempt to contain North Korea, which could be taken to mean “Hands off” but could also mean “Let us deal with this”. I think, and sincerely hope, it’s the latter. I expect Mr Jintao to do a Gorbachev, where he visits the puppet leader of the satellite and, essentially, fires them. Let’s hope that this is the course China has chosen.

Leave the Euro alone!
The current speculation, popular in the Anglo-saxon world, that the Euro is “over” or “breaking up” is grossly irresponsible. It’s equivalent to having recurrent articles in, say, the Eurozone press alleging that American and British financial firms are insolvent and about to collapse. Both fair game given freedom of speech, but both highly political and grossly irresponsible. Although the Eurozone has issues, namely a trade imbalance and lack of consolidated mechanisms for debt restructuring or devaluation, the currency itself is neither at fault nor failing. Suggesting that it is is little more than politically motivated speculation. The value of a currency is, ultimately, borne of public confidence – Just like the value of bank deposits, or shares, or CDOs. Undermining is certainly an option, but should be recognized as a hostile political act.

The disastrous British government
It should now be apparent to all that the British government and it’s Big Society brand amounts to nothing more than an abdication of the state’s responsibilities towards the citizens. We give back the welfare state, and hey, we can have the Big Society instead. The state undertakes to do nothing for its citizens. The Big Society will do it instead, if the Big Society wants. It’s the fast track to the kind of libertarian society that Hayek could only dream of, and there hasn’t even been a debate over whether Britain wants it. Sadly, political discourse in Britain has been weakened and bought by media to the point that real policies and issues do not matter. The business party didn’t win the election, but made a deal to power, and is now dismantling the state before anyone can act. They have no mandate to do so and ought to be challenged and impeached. As for the Liberal Democrats, they deserve the dustbin of history.

That’s wrong. It’s an unhelpful and misleading conception of racial conflict. Seeing it as a category conflict serves the wrong agendas. In fact, the crime of racism is about denying rights that are universal. That white people are the perpetrators and blacks usually the victims is of no bearing on the nature of the injustice. The correct formulation of racism is that people form groups based on arbitrary identifying traits, the groups fight, and it happens that certain groups become habitually victimized. The correct course of action is to frown upon loyalty to arbitrary groups and instead embrace all people as moral beings. The response to racism is to be universal.

Feminism is supposed to be a violation of universal human rights. Respectable formulations of feminism are not gendered. In law, rape is about people forcing sex upon other people. It could be two men, and from that viewpoint the crime could only be defined in terms of fuzzy universal rights. Emancipation of women is uncool. Equal opportunity is polite. Equality is supposed to mean the same access to some abstract rights that no-one is going to get too worked up about.

That’s also wrong. It is a massive appropriation and dilution of the movement. Feminism is not about universal good behaviour. It’s brutally gendered. Violence is being perpetrated by men upon women, because of the different reproductive biology that defines the categories “men” and “women”. Men wish to claim control and extract reproductive benefits from women while dumping reproductive costs on them, or rather evading their share. Everything about feminism is about redressing this gendered crime. Visions of the solution are not symmetric, and to say that they are is complicit. Credible feminism isn’t about defining universal abstract rights. It’s about rebalancing the benefits and costs of reproduction to be more just, specifically between men and women.

• Personal safety and dignity: My clothes, my house, my money, my computer. These are mine in the sense that I need them to go through life and I need reassurance nobody will take them away from me. Actually I don’t own my house, I prefer to focus on my skills. But it’s the same idea.
• Control over resources: My project, my team, my blog, my plan. I want to control these things. If I had a business it could be my business in this sense of controlling what the business does. These things are controlled by me and I want them free from interference so that I can pursue my goals.
• The right to exploit: My shares, my invention, my song, my contract, my land. These are artificial rights that let me exploit resources, or the activities of others. If the thing is mine I can take any profit I can extract from it as mine to keep. This type of property is an exemption from the duty to share.

Only the first two are natural. The first is needed to have a society with human rights, although the boundary could vary. For example some people feel a strong need to own their house, and some don’t. But a desire for security of your immediate needs is universal.

The second right, right to control resources and keep them free from interference, is needed to form an advanced economy. You can’t build any kind of elaborate production or a complex technological product like a plane if you can’t control the resources and the activities that bring it about. This type of property is the necessary foundation for firms. Even things that appear to be free are based on property as control. Google services are free, but they control the site and it’s designed so that you depend on it every day. Linux is free in the sense that someone could copy the bits and start a rival project, but the actual Linux project is well controlled.

Property as the right to exploit is different. There’s nothing intuitive or natural about it, except perhaps that it formalizes feelings like “survival of the fittest”. Normally, if you have an idea that is successful or as a group you produce valuable things, you share. When nature yields oil or fish again the normal thing is to share. Perhaps in these cases we have yet to discover how to do so in a controlled and equitable way. To these productive activities, property is an overlord. Property claims what would otherwise be shared among the people directly involved, for one or a few people who are distant. It’s no accident that most property of this type is indeed derived from lordship over land.

Property for exploitation scales to really unintuitive extremes. While there are giant firms, which are large-scale structures of control, there are even bigger banks, funds, or other structures of abstract ownership. The ability to own for exploitation has long surpassed the need to own for control. The distribution of ownership varies between people in a way far more extreme than the variance of control. An investor can own a greater proportion of a firm than any human CEO can realistically control a proportion of its activities. This is unnecessary.

I think we’ve lost our relationship with property. We started with personal property and the need to control, but ended up slaves to a system of rent extraction. Our conception of the economy is completely preoccupied with the extractive and concentrating power of property. The more that this grows, the more it places a burden on society.

In their aspirations people confuse the first kind of property with the third. I once asked a startup CEO what motivated him to create and grow the business and he said something like “I want to provide the best security for the future for me and my family”. Now that is striking! I suspect Bill Gates and every multi-milionaire thinks the same. Wealth concentration is insurance against risk for the individual. Yet for society this is wrong at such a deep level. It creates a competitive arms race, where the security of those who succeed externalizes as relative insecurity for those less fortunate. It’s also a breathtakingly inefficient allocation of resources. Doubling the wealth of Bill Gates might make him feel a little more secure, but the money would buy much more subjective security if shared.

Allegedly, property as the right to exploit has a social function. Two in fact:

• It motivates the entrepreneur, the inventor, the farmer, the creative professional, or the crafter to do best by promising that they will reap the full benefits of their efforts.
• It allows inter-temporal consumption, in the sense that a group can buy property and extract income, and this can be a mechanism to implement for example pensions.

I dispute those. I think they have some truth in the small scale but they’re are mainly disguised fantasies of idle power and exploitation. Aside from the entrepreneur, which in this case I see with suspicion as an opportunist, all other small producers are better motivated by personal dignity, control over their means of production, and sharing among those involved in the work. Farmers and tech startup professionals alike don’t want the risk that comes with full property rights. They want control, recognition, and security.

As for inter-temporal transfer of value, first of all this is a concept that merits deep examination in politics and society. We shouldn’t just accept it, or accept the formula presented at any time as policy. How much inter-temporal transfer of value should there be? Should value inflate, deflate, or be retained? Is there a limited return or an expiry date? If not, how is this system not simply a veiled structure for concentrating privilege? Secondly, inter-temporal transfer of value doesn’t actually happen. Real value has a short expiry date. What lasts is the ability to extract rent. At a large scale, the scale of publicly capitalized companies, ownership is equivalent to taxation but less equitable.

I think we don’t need the third type of property. There’s too much of it and it needs to be wound down by limiting rather than expanding property rights, and by reconsidering what we as a society want for corporate governance and the distribution or corporate surplus. There are lessons to be learned from the age of capital, but I think a unified concept of distributed ownership and taxation is due to replace it.

The reason for a firm to exist, primarily and sufficiently, is to produce goods and services that are needed or desirable in the world. There are several ways of judging and directing the firm according to this principle.

• The market is a very good indicator of what the world needs or wants, especially when it comes to the detailed and diverse wishes of individuals. It’s not sufficient, and certainly not right by definition, because the market is prone to manipulation, irrationality, and social injustice making the difference between true wishes and buying power.
• Critical opinion, commentary, or goodwill towards a firm and its activities. It’s no accident that quality consumer goods firms are held in higher regard than most banks.
• An objective analysis of the firm’s product and activities with respect to life, well-being, human fulfillment, and the environment.
• Policy. Companies need to be comissioned to create large-scale infrastructure where the market would yield lower-investment, higher use cost solutions

A second reason for a firm to exist is to provide comfortable and fulfilling employment to the people directly involved in the firm. Balance is the measure here. The firm is not a vehicle to get rich, nor is crushing, subsistence-level employment a goal.

Work should be fulfilling. Employees need to be empowered and feel free for that to be true. The interests of the firm and of customers should be seen as collective interests, and beyond this there is no virtue in austerity or self-denial at work. Fulfilment through life is just as important. Retirement isn’t a goal, but rather people should get fulfillment through work till the end of their life. Work should be fulfilling at 20 or at 80, but easier at 80. The character of work may need to change for this to be possible.

I believe a firm should be very selective about its team, and include only those who are needed for its activities and fulfil its ethos. Being lax about personnel turns the firm into a social burden. Having said that, a firm can accommodate more and less ambitious, young and old staff. A large firm is socially obliged to do so. Between them, firms need to provide income for life, although people may have to move to new firms when society’s needs and industries change. Such change is good, and resisting it is placing a burden on society.

Within the firm, compensation should scale much less than the difference in individual contribution, in effect being redistributive. Higher pay is a mark of recognition and compensation for greater commitment. It’s not a reward, and a business shouldn’t attract hose who see it as a reward. The reward for success is the power to use more of the company’s resources to achieve great things.

I believe a firm has to compete. It is essential as a form of discipline. Competition between firms is obviously in the interests of customers and everyone outside the firm. The best firms are good at taking competitive pressure early, informing everything they do. Lesser firms have to adjust to competitive shocks, or sometimes fail.

Competition is good for the firm too, and for its people. It provides an argument of the last word that can push aside inflexible thinking and bring in more relevant, more fulfilling production. Competition is good for people, physically. We evolved to better ourselves and to reach the peak of our abilities, in a constructive environment. We need competition, and find good competition thrilling.

A firm has to generate a surplus. If it makes a recurrent loss it’s either a burden to someone or it needs to wind down its activities. If it merely breaks even, the firm is putting itself irresponsibly at risk. It’s neither able to adjust to changes nor to expand to its full potential. So a surplus is good.

There are, of course, externalities that might justify a levy on the firm’s activities, such as to pay for environmental or social cost, and there are considerations that might justify subsidies. For example it may be more practically efficient or socially desirable to pay collectively rather than individually for the firm’s product. But after all these adjustments, the firm should still make a modest surplus rather than be at the mercy of bureaucracy.

What to do with a firm’s surplus is the central problem in Capitalism. I believe in most cases the firm should get first pick on its own surplus so that they can re-invest it. The surplus correlates with the firm’s success, and represents the power to further pursue the firm’s aims. It’s both fair and reasonable, in most cases, to hand that power back to the firm.

The firm should use the surplus in three ways:

• To mitigate risk and adapt to changing circumstances, for example by training staff or obtaining new equipment. The firm is obliged to look after its own health in this way.
• To expand the volume of its activities so that more people can benefit as customers or staff, to the extent that there is demand.
• To expand the range of its activities into similar products and services, so long as the firm has credible competitive competency in the new areas. If they can make great laptops, they may be able to offer great phones or music players.

Beyond this, and this difficult governance problem, the firm should no longer manage its surplus. It should not expand for the advantages of size, nor diversify into unrelated fields to hedge risk. Instead, the firm should bring any surplus that’s beyond its immediate competency to the investment market, so that other people may get a chance to apply it.

venture investment is good. It takes knowledge, judgement, and vision, and it makes new products, services, or sometimes entire new human abilities possible. It deserves respect, and there’s too little of it. Rather than paying out dividends, firms should incubate ventures or participate in venture funds. Startup ventures should be selected and managed by the usual criteria, except insofar as the funding firm wants to subsidise some activities that the firms themselves see as desirable.

When they reach maturity startups should, as far as possible float bonds rather than stock. They can be long-term bonds with yield dependent on the firm’s surplus. They can have discretionary yield in exchange for a level of control over the startup, like stocks. But crucially, the firm’s obligation on its investors should eventually be discharged, so that the firm can be autonomous and substantially owned by its employees, or more broadly everyone involved in the firm. This is necessary to allow the firm to pursue its social purpose, rather than being hostage to rent-seeking shareholders.

These views should not be controversial. This is how small businesses, large industrial corporations, and any other company that actually produces relevant, wanted goods actually operate. The great majority of people in a firm, if it’s any good, care about making good product and serving customers, or alternatively they care that the work is fulfilling. Only the high-level managers care about maximizing return to shareholders. For the most part, the autonomous firm would take similar decisions to the joint stock firm, but where they differ I think the autonomous firm would be the better model.

The autonomous firm embodies the traditional and intuitive view of work and production. It’s not the way the financial world thinks, and there is the aberration. According to the financial view, a business is a private mechanism to extract rent from the life and activities of others. It can be owned, traded, and broken into arbitrary securities. It is judged only by its effectiveness at rent extraction, and its actual productive activities are seen as incidental. Its employment function is seen as a complication, at best. Privately owned stock is promoted as a replacement of social taxation. We’ve slowly, over the past few decades, come to see business through this wrong financially centered view. This is a mistake. It’s not serving us well.

Anyone can take precautions if they have zero cost, of if they appear to have zero marginal cost. There is therefore a tendency to reduce the marginal cost of various precautions, processes, regular forums, documents, and the like by turning them into a running waste. That’s an attempt to make management easier, or more precisely to make bad management less distinguishable from good while sacrificing any efficiency.

Also, any vaguely competent functionary or committee can make tough decisions once the costs and benefits are unequivocally obvious. I once had a manager who, when faced with any important decision, asked his reports to gather all relevant information and present it in a table. He would only accept analysis that made the choice obvious, which is equivalent to saying he only made decisions of zero risk and zero marginal value.

The valuable work is to take decisions that are costly now to gain benefits or avoid risks that are as yet unseen in the future. The good manager is alone, or at least needs to have peers who are above the daily affairs of their team and are able to look into the longer horizon. Effective management has to be empowered, like business, so that risks and gains can be balamced and foresight applied.

Israel was formed by people who shared enough of a language, culture, and religion to see themselves as a nation even though they were a diaspora, or an ethnic group living in imperial lands. They revived or manufactured a national ideal on dubious claims of historical continuity. They created their state through sheer determination and no small amount of treachery and underground support. They defended and grew their state against destruction using ardent, incontestable violence.

That’s how every other nation state in the old world came to be. Greece did exactly the same things in the 1820s, as did the Balkan countries. The nation states of Europe had formed in similarly violent ways, justified on similarly new and artificial national identities, only a century earlier. This behaviour was thought normal of nations until the 1920s. If Israel had been formed in the 1840s, say, and it was still extinguishing its Arab minority in 1910 by interning them and blockading their supplies, no-one would protest. That’s what nations did, back then.

Unfortunately the world’s experiments with ethically pure nation states are over. This idea burned with the houses of Dresden and Tokyo, and in two large explosions over Japan. By the time the war was over it was clear to all technically advanced societies that another round of tribal warfare between nation states would negate them, if not all life on the planet. In a world of six billion people, half of them commanding nuclear arms, the unfettered nation state is practically untenable.

When the full horror of the holocaust was uncovered, it became clear that the nation state was also morally bankrupt. Races of people with a language and a culture, like the Jews, existed relatively happily in empires. Rome, Byzantium, the Moors, the Ottomans, the British, or the Americans didn’t have a particular issue against Jews. Neither did the feudal lords of France, Germany, or Eastern Europe. Forms of governance that are not based on kin are, by definition, tolerant, or at least tolerant of who you are by birth.

Nation states are different. They demand that the state is for one race only. Any sizeable minority who are caught in its territory must be expelled or exterminated, since the state has to be nationally pure, and in any case the nationalist ideology doesn’t extend moral empathy any wider. A guest diaspora is a particular problem for a nation state, since in its own terms these people have divided allegiance. Fascism is a natural tendency for a nation state, and for the most fascist state of all Jews and Gypsies were impossible, incomprehensible elements that it sought to destroy. Clearly the Third Reich included conflicting notions of nation state and empire, and it’s their nationalism that we mostly identify with their crimes. An empire can’t swallow a continent and then complain that its people are diverse or stateless. But the monster of nationalist ideology was already rabid.

It’s a tragic irony that the people who survived the greatest horror in the name of European nationalism now want to have their go at the nationalist project, just as Europe is dismantling it. Do they not see themselves veering towards the same kind of crimes? Israelis don’t put Palestinians in death camps, of course, but they’re only more civilised by degree. They put Palestinians in walled enclaves, effectively internment camps, with no clear prospect of exit. They merely keep them undersupplied with medicines and other basics, and only kill a few occasionally. They destroy homes and don’t allow rebuilding, but at least in Israel it’s warm. Israeli (and Jewish, and World) public opinion would recoil at any attempt to destroy the Palestinian people efficiently. So Israel pursues a policy of destroying them slowly, generation by generation.

Israel clearly and forthrightly wants one thing. It wants all the good land between the Mediterranean, the Gulf of Aqaba, the Jordan river and Golan for the Jews. Just as Greece wanted all the land at the south tip of the Balkans for the Greeks. It’s a nation state for one people. From the point of view of Israel the palestinians are not a menace, they’re an inconvenience. Israel simply wants them to disappear.

It would all have been much simpler if the Palestinians, once displaced, were absorbed by neighboring Arab nations. Forced population exchanges happened many times through the nation formations in south-eastern Europe in the 1910s and 20s. Although they were brutal and lacking any measure of fairness, on the whole the human outcome was far better than any prolonged settlement dispute could have been. But the surrounding Arab nations closed their borders to Palestinians or settled them in conflict zones, using them as pawns to prevent the establishment of peace and normality with Israel as part of the region. In this they are complicit.

Had history ran a course similar to that which gave us Greece or Bulgaria in the 19th century, as anyone could reasonably have predicted, we’d probably have a nation state of Israel substantially at peace with its neighbours. There might be some tense posturing from time to time for political effect, but on the whole the region would be growing a much finer class of problems such as demands that Israel and Lebanon enter the EU at the same time. That Israel might still seem parochial, but it would be reasonable.

Unfortunately it’s too late to take that path. The Palestinians are by now Israel’s responsibility, and Israel has to deal with them. There’s only one moral and viable way to move forward, and that is to abandon the idea of Israel as a nation state, for Jews only. It doesn’t just have Jews. It has Jews and Arabs, and realistically any state in that location is going to see some Christians and various other minorities. Any form of governance that aspires to peace and acceptance, today and in these circumstances, has to be multi-ethnic. This may be a chagrin to those Jews who cling to a racially pure Zionist ideal. Too bad. Too late. Are they, in any case, anything but a fanatic fringe?

A multi-ethnic Israel doesn’t have to mean a raft prone to be swallowed by the surrounding Muslim world. It means a multi-ethnic state with a constitution that recognises and protects at least two main minorities. It means separation of church and state and rights that safeguard tolerance. It means equal opportunity laws and a balanced independent legal system. It also means mostly Jewish corporations and an army mainly staffed by Jews, for the time being, just as in the United States capital and rank is mostly in the hands of whites and that’s tolerated rather than enshrined. By any measure a multi-ethnic Israel would be a beacon to the region, if only Israeli conservatives would tolerate the idea and the elites of surrounding Arab nations would let it happen.

What is happening right now is not working, and is not going to work unless we wait for the slow extinction of the Palestinian minority and then pronounce the resulting peace a success. Israel is accused of occupying the land. It isn’t. An occupation is something temporary, and it’s assumed that the invader will leave, as the Americans will eventually leave Iraq once favorable arrangements for extracting the oil are secured. Israel isn’t occupying Palestine, and it’s unproductive to suggest that it is. Israel has won the land. The Jews have also done so much that is positive on the land that they have a claim of putting it to good use, just as the European settlers have a bona fide, although not a just, claim to the use of North America. These are not changes that you can undo.

Rather, the crime is that Israel is practicing apartheid. It is enclosing the Palestinian minority in walled enclaves on low-quality land that cannot provide a livelihood. It expropriates and blocks the movement of goods and people. It denies Palestinians fair access to a shared economy, or the freedom to pursue a viable economy of their own. There is a notion that a two-state settlement, with a prosperous Jewish state and an impoverished Palestinian state that’s not even geographically continuous, might be a solution for peace. That is fantasy. Israel today is like South Africa under apartheid, except that the repressed group is the less numerous. The whole land, for both people, is the only realistic path to peace.

If Israel really wants to live in the 19th century, or practice what in the 20th century we called apartheid, it needs to be punished. Now, anyone who criticises Israel is asked if they deny Israel’s right to exist. That phrase is about as unhelpful as talk of occupation. No one is suggesting that a march of Muslim jihadists be allowed to drive the Jewish people into the sea. On the other hand does Israel have the right to be an apartheid state? Of course not. Why should it? No state has that right any more. Israel has to choose between being a backward, 19th century state with 19th century international relations and economic prospects, or being admitted into the 21st century as an open and multi-ethnic society.

This may sound like asking the victims of the most terrible crimes, even as they face ongoing threats, to rise up and be better than their agressors. Yes, that is the idea! Israel has to rise up to this challenge and build a fair multi-ethnic society, despite having the moral cache of surviving a near genocide and the real threat of extremism or war. Otherwise, it’s just a miserable strip of land with two morally bankrupt peoples fighting. That’s unnecessarily too bleak a prospect, and one not fair to the hopes of the majority of both peoples.

North Korea should be an easy case
From the point of view of the center-right Western powers, Cuba is a difficult case. There’s communism that actually works well in terms of human development indicators and outcomes are dramatically better than the nearby basket cases of Haiti, Dominican Republic, or Grenada. So if you want to change the regime of Cuba that should be difficult, as it has been. Now look at North Korea. It is an economic and human ruin. The state is as a fascist horror and it is also hollow. There’s no pretense at ideology that might, perhaps, if everyone went along with it, work. North Korea is simply the personal fiefdom of one family of hereditary rulers. Neighbouring South Korea, although not free from struggle and suffering, is a glowing success by any standards. The two countries share a culture. If there was ever an easy case for regime change, North Korea should be it. Why is it so hard to depose one dictator and his sons and allow the country to unite with its powerful developed sibling, just like Germany? I remember in the late 80s Mr Gorbachev did a tour of the Eastern Bloc countries, presumably had a frank chat with each of their leaders, and they all toppled a few months later. Isn’t it time for Mr Jintao to pay a visit to Mr Jong-Il?

The Lib Dems blew it
The worst thing a politician can do, short of being personally caught in corruption, is to openly seek power for its own sake. There has to be a reason for coming to power, such as to fix social ills or otherwise enact positive policies. Seeking power for love of power is, and should be, a signal to vote the politician out of office. While it was reasonable for Britain’s Liberal Democrats leader Nick Clegg to join a coalition with the conservatives, the Lib Dems were voted in because of their stance on policy, which is different from the Conservatives’ policy. An honorable coalition would thus be a compromise, where Clegg accepts a share of government but affirms that his policies are distinct from Cameron’s. The two leaders should be visibly in conflict, most of the time. Instead, Clegg was so delighted to get a shot at government after his party was excluded that he essentially hired his and his MP’s services to the Conservatives. In my view this is not lost on the Lib Dem electorate, and I expect the party to be consigned to the backwaters of British politics for decades due to this mistake.

Why not lose €0.10?
The Euro is clearly in some trouble. The larger EU economies have had to absorb risky debt from Greece, and it looks likely that they may have to absorb some more from Portugal, Spain, or some other weak economy. German chancellor Merkel wants the solution to be fiscal prudence for all member states, so that no-one can run budget deficits. Although a good long-term goal, this is naive as a short-term solution in my opinion. Germany and a few other countries are unusual in being able to run surplus budgets. Even powerful states such as France or the US run deficits. And Germany or China wouldn’t run surpluses if other states didn’t run deficits. For historical reasons Germany doesn’t keep a large army, while Greece and the UK do (for different reasons). EU convergence must run a lot further ahead before member states can be treated like municipalities, which are able to draw on central support but are expected to balance their books. So in the absence of such miracles, there are three ways to resolve the Euro risky debt/deficit issue: Default, austerity, and devaluation. The last option is clearly preferable but it is taboo. Why? Surely a modest drop of the Euro, say 10c, would calm markets while hurting very little, if not benefiting the export economies. What sort of reasoning or interests keep this obvious option off the table?

The state that we think we have, the nation state, has only had a short and brutish existence. European nation states took their present form in the 18th or 19th century. Before this there were other forms of governance — empires, city states, feudalism — with varying degrees of size, ethnic cohesion, strict or lax laws, open or closed borders, etc. The most striking difference though has been the relationship of people with government, ranging from equal partnership to open exploitation. The nation state brought three centuries of coercive policy making coupled with paternalistic welfare.

Today the nation state is in crisis, not so much because of open borders or because the clan wars that it caused threaten to tear the world apart, but because its social contract is in crisis. The modern state can neither enforce policy nor provide welfare with credibility, and we’re not collectively sure if it should. We need a clear model of the state and its role.

What is a state supposed to be then? From the perspective of the social contract, in other words the deal between the citizens and government, we have three prevailing models in the West:

• The state as kin. The state is a large family. You’re accepted as a member if you are biologically related as offspring or mate of another. The state looks after the collective good of the kin, to the detriment of those non-kin. That may mean coercion within the state to make sacrifices, and war against foreigners. Since the membership of the state is closed, the state may wish to participate in relationships with other states but does not wish to open borders or be subsumed in greater entities. Examples: Israel, Japan.
• The state as a charter. The state has a territory in which certain rules apply, to everyone. The belief is that prosperity, justice, and human flourishing follows from an open society based on good rules. The charter state is open to all people, but needs to defend its jurisdiction and its charter in order for the latter to be meaningful. The state sometimes has to intervene between people to defend the promise made to all, and may wish to export its charter or create a greater chartist structure. Example: France.
• The state as a service. The state collects subscriptions, usually called taxes, builds infrastructure, and provides services: Defense, health, information, transport, banking, pensions, communications, etc. It retains a monopoly for some of these services, it’s a wholesales for others, and a retailer for some more. It prefers being a monopoly-wholesaler, leaving retail to private firms. The state doesn’t care that much about kin or territory, but rather cares about solvency, revenue, and entitlement or otherwise of service users. This state sees itself first among equals in relation with private firms. Example: Britain.

These conceptions of the state are very different, but we don’t usually see that because we’re used to the kind of state that we live in. In a world going through rapid globalization, we need active debate on the types and roles of states that we want to bring about in the future.

In my opinion, the state as kin is indefensible after 1945. Most of Europe has accepted this as consensus and thus the EU was created, largely on a chartist vision from France. A few notable nation states remain, due to their exceptional circumstances:

• Japan remains as nation state due to the long period of isolation in its past. Eventually I think it will become chartist, over many generations.
• Israel created a nation state after 1945, ironically to escape the horrors vested upon the Jews by the rampant nation states of Europe. It’s simply late to the game. Nation states are over, and Israel has to become either a chartist government of the region with a responsibility to all people, or a welfare state for Jews that can co-exist with a similar one for others.
• South Africa was a clearly indefensible state of the Afrikaans kin, and that structure was dismantled.

The United States is divided among all three influences. The founding of the American state was clearly chartist, and France even gave them a nice statue as a gift to celebrate this. For most of its history, however, the US acted as the state of the Anglo-Saxon kin. It embraced those Europeans who were closest to the kin, such as Germans, tolerated others such as Italians, and abused those who were clearly not kin: Blacks, latinos, asians. The Anglo-Saxon America clearly had no qualms about attacking distant, non-white people. The third influence, which is gaining ground, is to see sates and the federal government as financial services firms, with a few R&D departments, that provide a kind of backbone to private enterprise.

The EU stated out with the explicit claim to end the clan wars that ravaged the region for millennia. In this it brilliantly succeeded. The earlier years of the EU, and most of its architecture, is chartist. It unifies rules, creates enforcement mechanisms, and tries to ensure openness. In my opinion it lacks corresponding development of its services role. There has to be a unified approach to taxation, citizen’s obligations, and citizen’s entitlements between member states. That doen’t mean they should be the same, but rather they all need to be comparable and equally fair, and there needs to be an open way for citizens to join, leave, and transfer between welfare systems as they move through the EU.

I don’t know enough about China and India to characterise them. From a western perspective, China appears to be a kin state. It’s organised as a patriarchal family, where citizens are supposed to respect authority and work on common goals, in exchange for protection. Dissidents are severely punished. If that’s really true, China’s saving grace its lack of expansionist or imperialist tendencies. Even so I worry that a kin state containing one fifth of the word’s people will lead to conflict or exploitation depending on how those outside the kin organize themselves. By comparison, India appears to be so variegated that it’s not a credible kin state. It has strong chartist and some services elements, which I think is better for the long term welfare of the people in the region. I don’t know enough about it though.

These are important questions that need to be at the center of policy. If we ignore them the growth and diversification of private firms into providers of everything, from search to phones and from groceries to mortgages, will push states into a similar and shrinking role. You’ll buy healthcare from Tesco or from the NHS. You’ll use an infrastructure made by Google or by DARPA. You’ll pay your debt to the fed, or HSBC, or GE. What is the difference? That is a de-facto libertarian society.

A libertarian society may be a valid vision for the future. I sincerely doubt it, but the point is the world’s citizens shouldn’t sleepwalk into it while capital pushes it.

Merkel needs to go!
The German leader ought to be defeated in the next elections for blowing the handling of the Greek debt crisis. She’s been incredibly naive to treat the matter as a solvency issue for one country. Greece, for all it’s failures, just happened to be the weakest of the small indebted Euro economies. Financial markets speculated against it, and Europe failed to see the problem as what it was and stop it in time. Sarkozy and even Obama urged Merkel to bring solidarity in the Euro but she thought voters wouldn’t like it. Then the Greek crisis became a Euro credibility crisis, with markets devaluing the Euro and influential economists such as Krugman and Mankiw writing that the Euro may be “over”. To be sure, German voters won’t be happy, but they’ll be unhappy about Merkel’s colossal failure of leadership over the Euro zone. Update: EU leaders got their act together on Monday.

And did Brown really need to go?
Every few years the British media go off a politician. The previous one was Ken Livingstone, the somewhat socialist but very pragmatic and effective mayor of London. After praising him for several years the media suddenly decided he was a joke. They didn’t have any specific issue with his policies, they just declared he was finished. Same with Gordon Brown this last election. Everyone agreed that he handled the financial crisis pretty well and that his main shortcoming was an almost complete lack of charisma (probably a relief after Blair who had too much). Yet the media decided he had to go. No reason given, just go… Is that a democratic press?

Yay for incompetent bombers
By all indications the guy who planted a car bomb in New York was a random person who became unhappy with the way things are, started adopting more extreme views, and eventually decided that blowing people up would improve matters. He was kind of useless at making bombs, and you wonder if he really intended, with 100% of his mind, to kill people. Americans should be thankful that events turned out as they are. They should listen to his story, give him a prison term, and be done with it. The point for thought is what could society do differently so that these “outliers” don’t show up every few years. The wrong message is to drum up fear and go on a hunt for villains in the mountains, as even progressive media appear to be doing.

This must seem like tragic madness to outsiders, and even to many who live in Greece. When societies fail, it’s easy to conclude that people are irrational, that therefore there’s no prospect for improvement, and that imposing a basic plan or order upon them might be a good idea. Let me try and allay these notions.

Greeks are upset about the economic hardship that they now face. In this they are partly justified and partly naive. Greece was never rich, but it lived on borrowed money and immigrant labour for nearly twenty years, so now it feels poorer. Greeks would like the government to do something about their economic situation. Greece has relatively generous employment laws, like Germany, so the labour market and the pace of structural change in the economy are slow (when they are followed). The government is liberalising the labour market and Greeks are reasonably protesting because there’s no link between that concession and any specific growth prospects, and once the concession is made it’ll stay whether or not the economy improves.

What Greeks ought to be protesting even louder, and holding their politicians to discipline over, is failure to develop any strategy for economic growth. Greece has a mentality of economic servitude. There’s supposed to be some focus of wealth — the government, the EU, the abstract concept of tourism — and Greeks are used to attaching themselves to such a source of revenue, preferably for life. That worked, of sorts, when the country was economically insignificant. Now that it’s a reasonably-sized Western economy it has to produce as much as it consumes, and Greeks are incredibly naive not to face up to this reality. Both the public and politicians are arguing about moving the bar of entitlement a small amount up or down, without considering economic realities. A shared concept of economic growth, or the discourse needed to develop it, are absent.

Greece is structured as a strong welfare state, like France or Germany, but large scale industry never developed and aggregate output is way short of entitlement. Since the 1980s Greece has pursued a poor imitation of the American dream, becoming a highly individual, materialist, and power-seeking society. For a small country that’s delusional. Some people would like Greece to become more socialist, like the ex. Yugoslavia or the Nordic countries. It’s also possible that Greece could develop an entrepreneurial high-tech economy like Israel, hopefully without a war. In terms of tradition, family values, and temperament the cultures are quite similar. But the question of growth is not discussed. Only schoolchildren persistently bring it up, and the older generation brushes them aside.

There’s also a second issue. Many Greeks are enraged at their government’s dismal human rights record. That’s something both domestic and international media would prefer to ignore. Greece had a fascist dictatorship as recently as 1973, when it was normal practice for the police to abduct and torture dissidents. There followed forty years of democracy, ultraconservative at first but now similar to the centrist governments of other western states. Crucially, a reconciliation and cleanup process never happened. The first democratic leaders didn’t have the stomach for it, and subsequent ones hoped that the whole issue would be forgotten as affluence and European integration carried the country forward.

For a while it looked like Greek police had become a civilised agency, but the main victims of its abuses were immigrants – mainly informal workers and prostitutes from Eastern Europe. Over the last ten years these countries have found their equilibrium, and those immigrants who are still in Greece either became Greek or at least settled as long-term guest labourers. A small Kurdish minority, which could best be described as refugees from persecution in Turkey, was rounded up and hidden from sight a few months before the 2004 Olympics. Athens has small urban slums of Far-Eastern vendors and labourers and African prostitutes, but these are small areas and whatever the police does to these people is not widely seen. Recently, however, the police has been running out of invisible targets.

Some changes that styled police like a professional force were gradually reversed, and now they look and behave like a barely restrained occupying army. Police troops patrol in fatigues and carry automatic weapons. At demonstrations they hurt people — and not the few who come angry and prepared to fight with the police. Those usually know how to run away. Riot police beat random people, sometimes very young, sometimes old, severely enough to send them to hospital with serious injuries. Police release dogs on demonstrators or charge at them two on a motorcycle, running them over sometimes or the rider striking random people on the head with a steel club. That terror tactic serves its purpose of keeping the more compliant and “decent” people away from demonstrators. It is not picked up by the media.

There are also an increasing number of individual cases of severe abuse or death. Two were so extreme that they shocked the public for months:

• On 6 December 2008 a 15 year old high school student, Alexandros Grigoropoulos was shot by the police after an altercation. The incident sparked days of riots (Wikipedia).
• On 22 December 2008 an immigrant trade union leader at a cleaning firm, Konstantina Kouneva, was attacked with sulphuric acid (a powerful corrosive) and suffered severe burns in her face, eyes, oesophagus, and stomach (Amnesy International UK). This attack was carried out by unknown thugs, but no satisfactory investigation took place despite the obvious appearance of a labour-related terror attack involving a specific firm.

There are more cases that are less celebrated, if that is the word. Greeks see these events come to pass and conclude, correctly, that there is a failure of governance. There is specifically a failure, or rather a callous unwillingness, of those who hold the monopoly of violence to protect the citizens. When Greeks riot, what they are saying is that the police do not have the public mandate to hold the monopoly of violence. One clumsy, visceral way to reclaim it is to riot. Another desperate and misguided way is to attack the police, and there have been isolated attacks and even murders of police by random extremists.

As peaceful people get assaulted at demonstrations, most of those who witness it become fearful and disengaged. A few, however, become radicalised and they show up at the next demonstration eager to fight the police. The same happens when the police fails the public trust, low as it is. A cycle of violence develops, not unlike the kind that persists in occupied territories between disempowered youths and the much more powerful occupying force. That’s how it happens. It may be tragic and senseless but it’s not insane and real governance issues are behind the violence. These issues could potentially admit solutions and need to be brought in the open.

What is the world? It is of course the stars, the Earth, the weather, life, and all the things that are out there. But we do not perceive these things directly, nor do they affect us. What affects us comes through our senses, and the way we perceive is as much a product of our embodied senses and our mind as it is a representation of the true disposition of things. Our perceptions are shaped by the ideas we already hold.

As soon as our ancestral apes became intelligent enough to affect the world, seeking to make it more hospitable to their vulnerable existence, two paths were open. They could make tools, draw predictions, and try to alter the physical world immediately around them, or they could alter their own minds so that their experience would be less harsh, more hopeful, more meaningful, fanciful and interesting, and even less bound to the actual sensations of cold and hunger that the body sometimes offered. The ability to alter the human experience of the world through the communication of ideas is myth.

For most of time, myth was the dominant means for controlling our experience. If someone fell ill, the village could attempt a cure, or they could make the illness and possible passing away more tolerable through a shared imagination supported by art, mythical narrative, and ceremony. Faced with danger, people invented mythical protectors but also monsters to regulate that fear, as well as imaginary refuge of various kinds. People filled expanses of nature such as the forest, the mountains, or the sea with imaginary creatures and places, affording themselves a rich experience of these otherwise inaccessible environments.

When we look at other cultures we underestimate how much they control their environment. We see hunter gatherers of the present day and think that they live in nature. Not so. They live in a theater of experience constructed with art, ceremonies, tradition, belief, and imagination – much like ours but on an open stage. When we visit a great cathedral we admire it as a triumph of construction. That’s ironic, because the great construction was the artificial world of religion that it once radiated, transforming the entire city. We’re like kids who examine an old movie projector at the museum without ever having seen one switched on.

Myth is like beer, the other great technology for affecting perception. They have had an interesting relationship through history. Sometimes it has been complementary, such as in mysteries where ceremony and intoxication are used together to generate an intense alternate reality. At other times the relationship appears to be antagonistic, with religions attempting to be the monopoly providers of a constructed perception. The great advantage of myth is that it is socially constructed. Myth avoids the solipsism problem. Living in an imaginary world, but one that’s shared with your fellow human beings, is a meaningful life. Living in a private illusion is a kind of death. The need to inhabit the same world as each other seems deeply wired in us.

Myth is humanist. Belief in myth affirms that only the perception of the world by humans matters, and the physical world is not in itself important. Materialism is worth pursuing only insofar as it leads, indirectly, to a new shared experience of humanity that is, in some subjective way, better. It’s not ignorance that led the majority of human generations to build their societies around myth. It’s just that materialism didn’t look like a useful belief system until the development of agriculture, and even then the balance of credibility was unclear. The bold stance of living materially, without myth, didn’t emerge as a serious consideration until the renaissance. The story of human thought is the story of one humanist technology, myth, being replaced by a more promising technology, science, and not some tale of liberation from the forces of darkness.

The world doesn’t compel us to believe in any particular thing. Certainly not truth. We believe what we want, and we’re all realists and mystics in some measure. We accept new beliefs according to what is most compatible with beliefs we already hold, and what accommodates with our psychological needs. Many of us gather a mix of practical realism, objectivity, convention, and comforting principles that’s close to what would serve us best. Others evidently suffer under their own beliefs, feeling oppressed in mysticism or empty in realism. What we cannot do is move our belief system voluntarily. Someone who becomes more rational is absorbing a web of rational beliefs, not willing their mind towards reason.

Consideration of what belief system would best serve another human being is the only valid moral guide for anyone who seeks to change another’s beliefs. The believer who wishes to convert others to a religion using some argument from dogma, about the existence of god, a duty, or anything of the sort is acting out of simple selfishness. Faiths want more people to support their myth, so that suspension of disbelief is more effective. Understandable perhaps but not moral. The atheist who admonishes people to see the world as it is, or stop believing in nonsense, is just as callous and immature. They’re like the headmaster who takes your beer away because “it’s bad for you” or like the fool who stands up in the theater to point out that Juliet is not dead. Debating faith on the basis of rationality, or the opposite, is a useless and agressive stance, as it denies the other person’s worth.

Myth is not going away, nor should it. When we see ourselves as the complex web of ideas that we are, part of this realisation is frightening. It’s very uncomfortable to become aware of the core ideas, the root nodes of the graph, our moral axioms, our principles, our metaphysics – but we all have them. Some people personify them, leading to the belief system where purpose comes from god. Others use the instincts of human empathy and connectedness as the basis and try to live a good life as social beings. Still others become fixated on the pursuit of ideals (money, ideology) or become addicted to pleasure from time to time. But we all have our private metaphysics, our own existential myth that drives us forward in an otherwise indifferent universe.

Myth is an evolutionary adaptation. There’s no rational imperative to prefer a world with flourishing human beings over one that is desolate. Our individual urges to stay alive, have children, and do good are instincts created by our evolutionary past. Death is frightening not because it is the end of life but because it calls the value and conduct of our life into question. A mind without foresight, such as the minds of animals lacking a large frontal lobe, can live on instincts alone. We use myth to isolate our instincts and basic drives from our conscious mind, and in this way protect ourselves from nihilism.

This post is dedicated to Paul Crowley and Alison Rowan, whose opposed perspectives, as I remember them, illuminate this discussion. It’s been a long time coming. Enjoy Beltane.

Pavlos’s Thoughts – Episode 2 – The Greek financial crisis

Talking post (podcast). Click to open as MP3.

Key points:

• The core problem is that the Greek economy is unproductive in structure and ethos.
• Greece will probably have to default against the debt market, if not now then later.
• It would be better if the EU dealt with the issue instead, by taking over and restructuring some debt.
• The EU should probably create a framework to deal with national solvency in a consolidated way.
• Fortunately the Greek economy has poor coupling, and could be protected temporarily by price controls.
• In the long run the solution is to make Greece more productive by fixing exactly that – creating high coupling of innovative firms with the international economy. The best way to do that is probably to create international economic zones, which work in English by Western rules.

Feedback:

Suppose that you’re a young member of a family – a fairly traditional family – and one day dad says: “You know, the world has become a really dangerous place. In order to keep you safe we have to install bullet-proof windows and 24-hour security”.

What do you make of that? Well, there are four explanations.

• Dad is a hero. He’s a judge in a high-profile corruption case. You need the protection for noble reasons, and you need courage.
• You live in a really rough neighbourhood and need the protection just because the family is well off, which is sad and cause for thought.
• Dad has his priorities misplaced. Maybe he’s too afraid of other people, or maybe he needs to care for the family more in other ways.
• Dad is a gangster. He knows just why there may be bricks or bullets coming through the window and, in order to continue being a gangster, he needs to arrange security.

If dad is your government, especially the government of the United States, I think the last explanation is most likely.

You’re in a gangster family. It may look cosy and civilized at home, and dad may be treating you and mom very well, but on another part of the neighborhood dad’s goons are breaking the arms of anyone who tries to develop in a socialist way (Vietnam), sell its oil to the wrong people (Iraq), or simply stand up and defy the racket (Serbia).

That may cause bricks, or even bullets, co come flying through the window. That’s why you need Homeland Security. The honorable TSA who protects you in good faith, and the high-tech scanner, are there so that dad can continue being a gangster while having a normal family life. Domestic security is a moral hazard.

Yes, I do regard the US troops in the gulf as goons. The same goes for the ones that a long time ago brutalized Vietnam, and most other smaller deployments with few exceptions. Although I appreciate the risk that they take, and realize that many if not most consider that they are making a heroic sacrifice, I just see them as unfortunate. They’re sometimes misguided and usually powerless ordinary people put in a terrible position by profiteering elites, like most soldiers in history. That may be too bleak a reality, but a reality it is. I feel some compassion for the troops as well as their victims, but no support.

Please also understand that although I’m naming the US state as the gangster, I don’t wish to imply that Americans, or their officials, are a bad stock of people. The previous world gangster was Britain, and the last one before them on a comparable scale was the Romans. Various lesser gangsters do the same thing. America just happens to be the top don right now. People are morally equal the world over, and people in power are usually the worst ones everywhere. It’s the function of domestic security as a moral hazard that I want to comment on.

Since WW2, what the US troops and policies do is uphold US interests, and in the case of the Third World that means aggressive “we win, you lose” interests. The pattern is consistent from Truman to Bush. The global standing and conduct of the US was different up to WW2, and Obama hasn’t so far started a gangster venture of his own.

Mostly the victims of the racket are weak and decent folk, like Latin America, so when the goons come nobody talks about it. The muslim world has proved to be a defiant family business. Maybe the stakes over the world’s last remaining oil are too high, maybe religion and identity are strong, or maybe they just have unruly sons. Anyway, after extortion had gone on for some time, someone through a brick through the gangster’s window. That was back in 2001, and the bloody reprisals are just ending.

Yes, although on a human scale September 11 was a terrible murder, on the scale of global power it was a brick through the window. It was a way of saying “fuck you” like when some unknown person in Edinburgh sent a brick through the window of Fred Goodwin, ex boss of the Royal Bank of Scotland, for profiteering at the expense of the bank and society.

At the level that terrorism happens today, thankfully, it’s resentment. Somebody is immensely angry or feels (wrongly in general) that causing some pain to the gangster or his family will improve matters. That goes for terrorism against superpowers – terrorism over occupied territory is a different game. Terrorism with weapons of mass destruction would be the equivalent of gang warfare.

The point of all this is that domestic security is a moral hazard, and its strength is an indicator of unethical state conduct. It allows the state to make enemies without fear of repercussions. If security is high, you can be confident that enemy-making is well and good, and going to continue. Unless you want the gangster lifestyle, making enemies of ordinary people is both immoral (the things you do to them) and unproductive. No family would really want to have that kind of relationship with the world, and no state should either.

What, then, is to be done? Should Homeland Security be scaled back so that terrorists can kill people more easily to express their resentment? No. I’m not suggesting that the level of security can be used as an independent variable. You need whatever security you need. However, Homeland Security should be used as an indicator. Remember that during Bush they were fond of using that color-coded scale? That ugly theater prop was surprisingly fitting, in a way.

First, security is not to be celebrated. Any official demand for security must be questioned. If the executive asks for additional security measures, ask them what they did to need them. A genuine need for security is shame. If the state makes a good case that the enemies are genuine, then the public must see it as a problem to live in a state that has real enemies.

The US media have shown some agility in portraying terrorists both as criminal extremists and as irregular enemy combattants, using whatever metaphor suits. They have portrayed the problem of world security as irrational. Terrorists are mad. They blow people up because they have views that don’t even fit into a world order of the present time. Well that’s not accurate. They have recognizable demands and criminal methods, like the Somali pirates. The media don’t portray the pirates as mad, and neither are the terrorists. Both are sane and in the wrong.

The media also assert, especially using September 11 as an example, that we’re at the stage of gang warfare. That the enemies of the US are out to commit genocide, and that if they had access to weapons of mass destruction they would use them. That message is deeply unproductive. We’re at the stage of bricks through the window (bad as it is, when it means that innocent people are murdered). The claim that a weak nation is willing to let genocidal acts be committed against a strong has not been demonstrated, is in my view false, and to propagate this myth is morally reckless.

Secondly, the real problems of political security need to be tackled. Large parts of the world’s population should not be enemies of the US, or whoever might be the top superpower at another time. Policies that make these people, mostly poor people, hate the masters of the world must be changed, and that means, to be blunt, no more coercion of wealth and power away from the poor and towards the rich. That in turn means a less extravagant lifestyle, or at least consumption, for the ex-gangster’s family. It does mean bringing the lives of the best and the worst off closer together, and if you are the spoilt child of the gangster family that will take some disillusionment. Material compromise is needed here, in order to achieve harmony and progress.

Of course, there will always be a few people who take extreme views at odds with their community. That might be said of neo-nazi or libertarian terrorists native to the West, for example. These should be approached as criminals, which also means with due process and respect for human rights. Some such extremists may be found in the Middle East, or anywhere really, even in a world order that is just. However, Interpol and not Homeland Security would be the right agency to guard against them.

When the world superpower stops doing evil, it needs also to do some good. There’s plenty of resentment built up around the world, and it will fade with the generations, but it would be better if it fades faster. America (and Europe, and China) must be seen to lead the world and bring it to a good place, and that means actually doing things that are good for the world. It doesn’t just mean better PR. The same wish is expressed by many, for reasons that are not only to do with security.

Then, when the world is more just and the United States is seen in a positive moral light, security should actually be scaled back. This is a difficult one. Security is sticky. No-one wants to be the politician who cuts back on security just before people get blown up. To some extent, security has to rise steadily in response to the technical sophistication of extremists, but it’s far above the curve today. When foreign public resentment is reliably low, and an honest assessment of threat shows the need for security to be genuinely low, excess security should actually be trimmed off.

Security should be at the lowest, not the highest, level consistent with safety because that is the correct moral incentive to any government. The government whose citizens are protected no more than those of any other people around the world is one that is acting morally – not because fear of terrorism holds the state hostage but because an undertaking to its own people to function without the moral hazard of perfect security is an undertaking to function morally.

Coercive leadership is what you get in a dictatorship, or a pack of dogs. The leader is whoever took the post by force. They stay in power as long as they can defeat or deter challengers, which requires that the leader is the strongest, literally or in the sense of being the most ruthless. There is a top-down power structure that keeps the majority in line by reminding them that they have no choice.

Charismatic leadership is what you find in a band, or other relatively fresh voluntary association. The leader is perceived as being the best at whatever is the aim of the organization. Followers follow the leader because they value their inspiration and direction. Any challengers would have to demonstrate superior ability, rather than attack the leader as such.

Conventional leadership is the kind found in democratic states and other large, mature organizations. The leader has no distinguishing characteristics other than fairness and commitment. The members of the organization subscribe to the leadership because they see the benefits of structure and coherence. The leader is expected to identify and publish a consensus direction, but not primarily to steer the group.

All three kinds of leadership have validity, including the coercive one in certain contexts. Problems in leadership typically occur when the leader misrepresents, is not true to, or changes the kind of leadership that they are in charge of.

States are almost always structured as coercive, because of their roots in ethnic and class conflict. They emphasize forced compliance with laws and have a large domestic enforcement apparatus. This does democratic polity a disservice. Substantially, modern states are conventionally led. Laws are obeyed and institutions observed when the majority think that those are useful. Coercing the majority is unproductive. Dissent ought to be accommodated and outright enforcement reserved for those who are too selfish or short sighted to abide by the norm.

From time to time states get a charismatic leader. It’s not clear whether these are good or bad. Kennedy was charismatic but he escalated the Vietnam war, nearly triggereed WW3, and sent people on impressive but useless trips to the moon. Gorbachev was a conventional leader who embarked on the task, deemed necessary by consensus, of modernising the Soviet state through a reformist path. I prefer Gorbachev. Charismatic leaders are also prone to idolization, so that the nation feels that only a supposedly higher grade of person can provide leadership.

Businesses, unfortunately, use a mixture of the three forms of leadership and change the balance between them from time to time. New businesses in the traditional economy such as bakeries or factories are usually coercive, since whoever has the founding capital has the power. Tech startups are usually founded on charismatic leadership, and not much more. As businesses grow, whoever is in charge of each department or function implements it according to their concept of leadership, resulting in an inconsistent mix.

Mature businesses ought to be conventionally led, providing their members with a large measure of autonomy in exchange for responsibility. Many have this culture, and most are less coercive than states. Businesses work with carrots, states with sticks. Even so, the transition that businesses make to conventional leadership is often imperfect. Classic businesses retain too much of their coercive heritage, while new economy firms find it hard to make the transition from charismatic to conventional while retaining value.

If you want to be a leader, you must be very clear and forthright about the model of leadership that you and the group are signing up to. When you get a mandate, you get a mandate to lead a certain way. If you’re coercive don’t try to smooth the bargain by pretending otherwise, and if you aren’t don’t touch coercive instrumens. If you’re charismatic, inspire and if you can’t do that step down. If you’re singing up as a conventional leader, be fair and represent; don’t steer.

Some people will enthusiastically follow you whichever type of leadership you are true to. Others will respect you but look elsewhere for the type that suits them. Nobody will appreciate it if you try to play more than one of these roles at once, or change it once in power. To change your form of leadership you need a new mandate.

If you dislike the leadership you’re under, coercive and charismatic leaderships are relatively easy to change. These forms are inherently unstable, and held together by fear or by the leader’s personal ability. If you’re brave enough to do so, you can challenge the leader and seek to replace them in their post, or bid to implement a different form of leadership. A transition from these forms to conventional leadership is usually popular.

The hardest kind of leadership to change is conventional leadership. The majority has so much invested in it that it’s almost impossible to even articulate a challenge that’s meaningful and yet within constructive bounds. That’s why democracies struggle with challenges that turn into riots. In business you have to break off and create a pocket of coercive or charismatic leadership to innovate. You will eventually have to return it to conventional leadership when it matures.

Microsoft marketing
You don’t really know what you want from your PC, and neither do we. We’re all in the same boat! So we made this software that has a whole bunch of features. Put it in your PC and it’ll do things. By the way your friends all have it, so if you go with the flow you’ll be able to share stuff.

Open Source marketing
User! You have no idea what you need and we’re not even going to attempt to tell you. Behind this link is our latest software, which we’re very proud of. If you use it, maybe you will see…

Guess who wins…

Microsoft, of course. They identify better with the user and address their anxieties, which are mainly about unknown future needs and social connection. It’s no surprise that they continue to have the largest market share, beyond what can be explained by lock-in or inertia.

Apple’s message appeals to customers who are sufficiently self-assured and clear about their needs to go for the product, and who want to be aloof to some extent. That’s a minority, but it’s growing as product categories such as PCs, media players, etc. become more settled and universally understood.

As for Open Source, this kind of defensive marketing tells consumers quite accurately and firmly that developers don’t care for them, and they’d better stay away. It’s a product for industry professionals, who appreciate the lack of a marketing layer. A few of the Open Source projects, such as Gnome are changing their image and aiming somewhere between Microsoft and Apple for their consumer appeal. That’s an improvement, but it’s a “me too” position without any unique attractiveness or solid reassurances aside from cost and freedom assurances. The latter may be winning points in government or emerging markets.

Google comes along as the late player, with marketing like this:

Google marketing
We noticed that you were doing these things a lot, so we’ve made it possible to do them on the web. We’ve put really smart people on it so it works right, and it’s free. Just use it. Click here. We promise not to be evil.

Will this work? Hard to say. Google is certainly building a reputation for making things that actually work, for everyone, without the different elitist characteristics of Apple and the FOSS people. However the burden of proof for Google is enormous. If a traditional software vendor wanted to be evil they’d have to sell you a malicious, or more likely compromised, product. With a hosted model like Gmail, Google Calendar, or Google Docs, the vendor has all your data already and could in theory do with it what they like. The public, much as we like Google’s no-commitment services, is reluctant to commit that kind of trust just yet.

Despite this, somehow, the Greek school system managed to give me one valuable teaching.

It was the story of Antigone, by Sophocles. The story opens after an insurgency. Antigone’s brother, who had attempted to overthrow the king, has been defeated and lies dead on the street. The king declares that he is not to be buried, as a form of debasement. Antigone insists that he has to be buried, because that is their duty to the gods. They both insist, and the substance of the play is them making their case. The king sets out the formal, legal right. Antigone, the individual, argues that there is a moral right. The legal and the moral right are not always the same. And when they differ the moral right is compelling.

I don’t know how this 2500 year old brazen story of humanist conviction and rebellion managed to make it through the stolid, reactionary school system and be taught saliently in substance. But I’m grateful.