“A significant part of the problem with the world development community is that arrogant people in developed countries feel they need to impose “development” on countries they consider backward. ”

The purpose of this development is not to devlop these nations but to steal their resources. Viewed like this, the policy has been very successful in achieveing its aims and has increased the wealth of western nations vastly compared to what we would have had had we left them alone since WWII. I guess you could argue that had we left them well alone for the last 400 years, overall the world would be a richer place, even if the western nations and offshoots were not so rich, however we’ll never know.

Now you would advocate completely free markets that will result in the dismantling of the US and other western economies via wage arbitrage. I think this would be a fair outcome (and in fact unavoidable), however I expect to see lots of conservative western free market advocates back pedalling strongly as their current wealth and comfortable life get sucked away within a generation. The free market will then look a hell of a lot less attractive.

No. Technological innovation is partly the result of a surplus existing after meeting basic requirements for living. The surplus can be used for increasing population, increased standard of living or innovation. In history, the surplus is first used to increase the population, almost without exception. Increased pop leads to urbanisation. Urbanisation leads to increased exchange of ideas – the ‘veolocity of opinion’, if you like. Veolocity of opinion is without doubt increased in free soceities with repect to unfree ones. Un-free societies expend alot of their surplus simply in supressing opinion! On this we agree, and I don’t advocate unfree societies.

I’m after the fundamentals here, and I think population size is the bedrock. Next up in terms of importance is political/social organisation, as you suggest.

But also, technological innovation is a chance driven process as shown by Nicholas Taleb – a process of trial and error. In this sense freedom and competition do help, but they are not a fundamental driver. Having more minds engaged in the trial and error process, and available to observe and take advantage of discoveries trumps the political climate. History bears this out time and again. A very large less free urbanised society will tend to technologically out-do a smaller more free rural society in the general case. Of course the ideal is a large, free, urbanised society as you point out.

Have you read ‘Guns Germs and Steel’ by Jared Diamond? It’s the best book on the real drivers of technology, IMO.

There are many developing countries besides China, India and Brazil. African countries are basket cases because they have weak or non-existent property rights, little economic freedom and markets and socialist government run by those enamored with “machine guns, Mercedes and monuments”, the three M’s of development specialist, the late Peter Bauer.

The economies of China, India and Brazil only started to take off after increasing economic freedom and market reforms. While they are still not truly free markets, they have gotten better. As with all things, improvement results are much easier to accomplish from a low starting point than a high starting point. And while there is not much else besides GDP to compare to, there is so much distortion in the figures of all countries, developed and undeveloped, that it is not a source of definitive proof.

For each of those countries, to the extent that they are not free means necessarily that they are ruled by strongmen. They impose their will, even if it may be in accordance with law. Even Stalin and Hitler had and used laws to their advantage. They may be less strong armed now than they had been, but that is the reason for their progress.

To me cause and effect of development went like this:

Ordinary people in feudal societies had little or no property. They were tied to the land and dependant on their lords. There was poverty and poor diets, which caused poor health and short life spans. There was very low population growth because people died off as fast as new ones were being born.

As society changed over a period of several centuries, people were gradually freed from serfdom, trade developed and some were able to make a living without dependence on the feudal lords. The increase in the size and geographic scope of trade led to the benefits of expanded division of labor and comparative advantage, which raised the living standards of everyone involved. Increased living standards led to better diets, better health and longer lives. As people lived longer, the death rate fell below the birth rate and population began to grow.

In spite of all of the limitations of the Magna Carta, it was an explicit recognition that people had rights and that kings had to obey the law. People began to assert their freedom at a fairly early time but it took centuries to develop. That freedom and the limitation of the confiscation by rulers led to the increased personal wealth and improved living conditions of the people, and a growing population over time.

Technological innovation is the result of freedom and competition. Those societies that leave their people free to profit from the fruits of their inventions are the ones that innovate the most. Those societies that are most repressed are the least innovative.

A significant part of the problem with the world development community is that arrogant people in developed countries feel they need to impose “development” on countries they consider backward. Much of the lack of development on the African continent is due to the imposition of political institutions that just don’t fit, conditions that weren’t chosen by the victims. Development would likely have progressed much more rapidly if developed countries had just left them alone instead of trying to make carbon copies of their own socialist regimes.

As far as externalities go, it is impossible to do away with them. They only change character and who gets the benefit and who pays the price. The way to minimize externalities is to maximize private ownership of property and the enforcement of property rights, and minimize collective ownership. There is no utopian system that can exist without externalities.

Correct – this is the first stage of the demographic transition – which I will cover more fully in the next article.

“What they don’t have, in virtually all cases, that developed western countries do to a fairly high extent, is secure property rights and rule of law. ”

Developing nations such as China, India, Brazil are growing at a greater rate of GDP growth than developed nations, even though their economic freedom is lower as you say. Therefore GDP growth is mostly driven by population growth, once some basic level of political stability is achieved. I do agree however that GDP growth is not the be all and end all. However, it is for the debt-money world system. The point of this series of articles is to show how GDP growth is going to tail off, and hence that the FRB system is not going to survive in the current form. In this regard, we are both callnig for the same outcome – with the mani difference that I expect it to happen naturally and you are calling for political change.

“Their governments are run by corrupt strongmen, much as you describe in the middle ages. ”

I think china,india,brazil are not run by strongmen – they do have rule of law even if it is not entirely free.

“Even before that early time, however, the geography and politics of Europe brought about a significant tension and competition between various governments and between those governments and an extremely powerful Roman Catholic Church.”

There has always been tension in europe from pre-roman times.

“That competition over centuries laid the groundwork and gradually led to markets and increasing freedom.”

No, I think denser populations drove technological innovation, leading ultimately to the green revolutyion of the 1700s which significantly increased food production and led to exponetial population increases. At this time the nations of europe were not free, and all markets were subject to the whim of the monarchs. So my assertion ios that pop growth came first – then freer markets, since they governments of the time did not have the resources to keep tabs on an increasingly large and mobile population. Once populations grew beyond the ability of elites to control them, more freedom was inevitable.

” Quite frankly, I see a very powerful connection between economic freedom and prosperity, both in centuries ago, and in our modern times.”

I agree with you on this, but I believe that it was initiated by high population growth, not the other way round.

” Increasing the money supply, however, is not the same as increasing liquidity. Money serves a purpose, but that purpose is served by any amount money, especially in this age of banking, checking accounts and credit cards. It is just as easy to pay $5 as $10, or 50 cents as $1. A dollar is a piece of paper or a check or an electronic transaction. There is no theoretical support for the need to have more dollar bills, or pound notes or any other currency, as an economy grows, at least none that rings true to me. It is far from self evident.”

I agree. My purpose is not to defend fiat money or debt-money – merely to show that the current world system will not be able to continue.

“Fiat money has been around for a very long time. ”

The issue is not fiat money – it is the use of fractional reserves. Whether fiat money is or is not a good thing is an orthogonal issue and I don’t plan to address this issue in these articles.

” You can choose to ignore the laws, like most modern governments try to, but you and they will be sowing the inevitable seeds that come from specific actions. The people all over the globe are reaping now the bad seeds that they have been planting for decades.”

Yes I agree. Currently the growth paradigm is ignoring some fundamental laws. Any system which does not explicitly price all transaction costs and externalities properly will be guilty of ignoring laws and the society will suffer as a result. Economic laws ignored by government or markets are still ignored laws either way.

Think about the third world countries of today. In spite of what scare mongers will say about overpopulation in those countries, their population densities are very low compared to developed countries. There is a reason for this. They die off at a relatively young age. They starve to death. They die in childbirth or infancy. They get malaria, etc.

What they don’t have, in virtually all cases, that developed western countries do to a fairly high extent, is secure property rights and rule of law. Their governments are run by corrupt strongmen, much as you describe in the middle ages. Even before that early time, however, the geography and politics of Europe brought about a significant tension and competition between various governments and between those governments and an extremely powerful Roman Catholic Church.

That competition over centuries laid the groundwork and gradually led to markets and increasing freedom. Those markets and that freedom led to trade between people and between geographic areas, gradually increasing the well being and prosperity of most people. As people became better fed and healthier, they tended to live longer. The longer life span from increased wealth and earning potential is where the population growth comes from, now as well as then. As one development specialist has commented, people didn’t start reproducing like rabbits, they stopped dropping like flies. Quite frankly, I see a very powerful connection between economic freedom and prosperity, both in centuries ago, and in our modern times.

Regarding money, liquidity is definitely needed in an economy, with the amount of liquidity determined by the participants. Increasing the money supply, however, is not the same as increasing liquidity. Money serves a purpose, but that purpose is served by any amount money, especially in this age of banking, checking accounts and credit cards. It is just as easy to pay $5 as $10, or 50 cents as $1. A dollar is a piece of paper or a check or an electronic transaction. There is no theoretical support for the need to have more dollar bills, or pound notes or any other currency, as an economy grows, at least none that rings true to me. It is far from self evident.

Fiat money has been around for a very long time. Even in china a thousand years ago, a form of fiat money was attempted. It failed because the government inflated the supply of money, which devalued the currency and it fell out of use. Fortunately for the people of that time, they had not thought of legal tender laws. A free and honest government will not have nor need legal tender laws.

Back to the point of the original article, The System Of The World, different political elites may develop their own system of understanding and manipulating their subjects. It is true that economics may not drive the intentions of those rulers of any age, but it, inevitably, irrefutably and powerfully drives the results of all actions by those rulers. You can choose to ignore the laws, like most modern governments try to, but you and they will be sowing the inevitable seeds that come from specific actions. The people all over the globe are reaping now the bad seeds that they have been planting for decades.

I actually do believe that money is one of the most important attributes of modern economies. What I also believe is that government issued legal tender, the money that people are required to use by law, is only one way to approach money. Government issued money could actually be one relatively effective solution to the problems which money solves, were it not for the inherent incentives for government to abuse it, and use it as an invisible tax to confiscate wealth from its citizens.

The weaknesses inherent in government issued fiat money have become obvious over the last couple of years, as interference in the financial markets has led to a tremendous bubble market which necessarily had to burst.

A solution to the problem would be to have currency competition, where the currency that best served the people would win out. That fact is that our government will not allow the competition because that would make them accountable to the people and they would not be able to inflate with impudence.

If you analyze your justification of government issued fiat money a little deeper, you should notice an inconsistency that sticks out like a sore thumb. Number 1 states that it is regulated and hard to counterfeit. Regulated it is, in that it allows no competition with its monopoly. The fact is that the money is very easy to counterfeit, if you understand counterfeiting as producing money with no value.

The government is doing the very same thing that a basement counterfeiter does, only on a grand scale. There is absolutely no difference, with the exception that government counterfeiting is legalized. If increasing the money supply is all we need to grow the economy, then everyone should be encouraged to print money in their basements. That way, everyone would have lots of money to spur the economy on. The absurdity of that scenario is only as absurd as the idea that government can print money from nothing and have no negative consequences.

There are many types of money, and even paper money itself started out as warehouse receipts for gold deposited with goldsmiths. In that case, however, every note had some value behind it. The problems only arose when the goldsmiths started to inflate the money supply by issuing more notes than they had gold on hand.

When money is not created as productivity increases, it serves only to increase the value of the dollar and make the cost of living less expensive, raising the living standards of everyone, especially the poor. If I have a dollar in my bank account and I want to buy a can of soup, I can just as easily write a check for 50 cents as for a dollar. The only difference is that I am better off if food costs half as much. There is obviously much more to it, but there is absolutely no logical support to the idea that the money must increase in proportion to productivity increases.

The dollar is still the world’s reserve currency only because all other major governments have been even more irresponsible than the United States government. There is a global economic crisis because all of governments used the central banks and the fractional reserve systems in their respective countries to pursue the same goals.

The United States dollar is not destined to stay the reserve currency indefinitely because of the tens of trillions of dollars in unfunded liabilities, which are going to cause worse economic crisis in the not to distant future. I don’t understand how anyone can look at the balance sheet of the United States and say that it is headed in the right direction, unless our government plans to pay its bills using federal land grants to medicare and social security recipients

You said: “The rise of great societies and population over the last 500 years roughly coincides with the development of economic freedom as a mass phenomenon,”

I disagree. I think that first came population growth, afterwards followed by the market. Prior to the population explosion from 1500 onwards all you had were strongmen – they made the rules and the market.

A market needs both liquidity and enforcement (as pointed out by dirk) in order for it to work. We need to see that neutral enforcement of civil laws that arose after 1500 as distinct from the military hegemonic enforcement that existsed previously. They are not the same same thing at all.

I do actually agree with most of your comments about markets, however I don’t see them as being as fundamental as you do. The roman, chinese and byzantine empires were not driven by economics alone. In fact they were driven mostly by violence combined with technological and population level imbalances.

Regarding fiat money, it has only been around for 30 years or so yet it has made remarkably little difference in global human historical terms. My contention will be that the fundamental driver of recent history has been population growth pure and simple, with other developments including more liberal markets, technology growth and improved enforcement of laws being secondary to this main trend. To support this I can offer the fact that early in population/GDP growth booms, the increased GDP normally initally goes towards increasing population while GDP -per-capita remains quite stable. Later on the increased population enables some of the desirable economic features you highlight to take place.

So to be clear – I don’t disagree with many of your economic arguments, I just see them as being somewhat of a ‘nth derivative’ of the primary trend, and therefore not the place to look when trying to assess future outcomes or propose what systems might best work in such a future.

Thanks for the comments. I will try to keep my analysis as fact-based as possible, howver obviosuly issues such as what the current social carrying capacity of the earth is, and how long a given resource might last for are wide open for debate.

Accordingly, I hope to focus on establishing some basic limit conditions which are hopefully not too controversial (whether they occur in 5, 50 or 500 years time), and ask some questions about how the current system would be forced to changed under such conditions.

In addition to population demographics, the other big variable that is a real wild card is the pressure of global wage arbitrage. When combined with a series of staggered demographic transitions, you end up with a wide range of possible outcomes that can have very destabilising effects (or none at all in other scenarios) on the debt-money-growth paradigm. All very interesting of course, but as a result my suggestions will necessarily be of a somewhat speculative nature.

I do aim however to keep my analysis as value-free as possible, even if the facts are mostly unlikely to be set-in-stone. I’ll let you be the judge of whether I succeed in this aim or not.

Letting both sides of a market transaction decide for themselves is the process of human cooperation. That is the Free Market for those who does not know. The law of supply and demand operates within the free market where prices are formed which in turn coordinates the activities of market participants. Interest rates are prices, to be clear.

And as E. Tabones have written here, four thousand years of price controls never worked, in whole or in part. It will not work for the next four thousand years either. That is an economic truth revealed by historical experience.

Thanks Dan.

You can use anything for money (cigarettes, beads, vegetables from your garden) but modern, dynamic, creative economies use government-issued fiat money and government-sanctioned debt because it is vastly superior:

1. It is legal and regulated and made to be harder to counterfeit;
2. it is portable and easy to store;
3. It is low cost to create more- and creating more in a growing economy is critical because price illusion and fixed prices ALWAYS lead to reduced economic growth when money is not increased as much as supply capacity.

The US dollar is the world’s reserve currency. Why? Because the productive capacity of our economy to provide redeemable goods and services to back that cash (not a hunk of metal in a vault somewhere) is stable (not reliant on the scarcity of one resource, like oil, and relatively untainted by government confiscation) and growing. As long as our monetary growth is consistent with our supply capacity growth (and the Southwest US’s abundance of solar energy will help with that)- not unlimited printing, mind you- the dollar will continue to hold most of its value relative to any other currency.

But to say government-issued fiat money isn’t critical to economic advancement is like saying spit works as well as grease. It’s just not true.