The global financial crisis The main causes and solutions Richard Parncutt 2013 updated June 2015 For a shorter powerpoint version, click here

The aim of this page is to present a workable solution to the financial crisis of 2008 in simple, direct language. No jargon, no speculative theory, no important sounding blabla. The aim is to understand the crisis from a practical viewpoint, avoiding all the truth distortion that can be found in the media. I will focus on what I consider to be the main points, introducing further detail only if it seems essential.

By "solution to the financial crisis" I mean re-establishing a sustainable situation in which free enterprise can work well. By "free enterprise" I mean buying and selling ideas, products and work on an essentially free market. Free enterprise also includes lending, borrowing, and interest rates. "Free" means that anyone can participate and that people are treated equally without discrimination. In a "free market", prices are primarily determined by the interaction between supply and demand. "Free" does not mean "free from regulations", because regulations are necessary to ensure market confidence by enforcing the honesty and reliability of market players.

The ultimate goal of free enterprise is, or should be, the greatest happiness for the greatest number, which in economic theory is called the utilitarian principle. This principle has been interpreted different ways, but my interpretation is rather simple. I merely mean that the benefits of free enterprise should not be confined to a a part of the population. Instead, everyone should have the opportunity to benefit. Not many people would openly disagree with that proposition, because if they did, we would soon be calling them racist, sexist, ageist, fascist or some other nasty kind of -ist.

The underlying belief behind this page is that a combination of free enterprise and social security, as practised in (or at least aspired to by) modern industrialised countries, is the best way to approach the utilitarian goal. Wealth is generated by free enterprise, and social security ensures that everyone can participate, by eliminating poverty. Social security has not quite achieved that goal, but it may do so in the future. more

Free enterprise used to work better than it does now. The global crash of 2008 really shook things up. What went wrong? How can free enterprise be saved? That is my main question, and I will argue that the answer is simpler that we have been led to believe. I will present an answer in two parts, one specific and one general.

The specific answer should have been clear since the Great Depression of the 1930s. It was caused in part by high consumer debt (due to banks lending too much on too little security) and a downturn in economic growth (which can save the economy when everything else fails). It was also caused by risky investments by large American commercial banks that should have been prevented by government regulations. The solution was to separate commercial banks (that mainly lend and borrow money) from investment banks (that gamble on international markets). This separation was achieved by the Glass–Steagall Act of 1932 and 1933 and it succeeded in preventing a repeat of the depression for several decades. But starting in the 1960s, and especially under the Reagan administration in the 1980s, the act was successively weakened. Under Clinton it was finally repealed (more), enabling the 2008 crisis. The simple solution is to revise and reintroduce the Glass–Steagall Act. When will that happen?

The more general cause of the Great Depression and the 2008 financial crisis was the wealth gap, the gap between rich and poor, which in both cases was far too big. In the 1920s, mass production put more and more money in the hands of the rich. The rising wealth gap contributed to both the high consumer debt and the fall in economic growth. The non-separation of commercial and investment banks was another reason why the wealth gap increased. In general, the wealth gap is also associated with rising national debts and the failure to tax the rich fairly and transparently. I will argue that, in general, the risk of financial meltdown increases as the wealth gap widens, which underlines the urgency of reducing it. 

Many of the factors mentioned here (consumer debt, investor confidence, economic growth, amount of risky investment, degree of separation of commercial and investment banks, national debt, distribution of taxation burdens, wealth gap) are related to each other in the sense of correlation, but that does not mean they are causally related. In general it is difficult to establish from social-scientific data whether a change in one parameter is causing a change in another. In the following I will explore the possibility that the wealth gap represents the main ultimate cause of the two financial crises in question and explore the implications.

Economists will notice when reading this text that I have no training in economics. I evidently don't know how to use economic jargon and I have surely missed some important points. I should really attend some economics courses and revise this text accordingly. But my ignorance of mainstream economics may also be a virtue. A lot of economic theory may be biased by the financial interests of people who could benefit from the presentation of certain economic ideas or theories; strangely, a search for "economics bias" in both Google and Google Scholar did not reveal very much. That is surely an interesting question that economists should be addressing. Maybe I have been looking in the wrong place? Anyway, like an  economist, I am trained in social sciences, and I am also interested in the more general philosophical problem of developing and presenting a convincing argument. These are the foundations for my approach.

Contents

National debt, income inequality, employment, taxation
Six ways to distort the truth
Anyone for a free lunch?
The end of national debt
The nature of money
The separation of public and private
The function of banks
Concrete steps toward sustainable recovery
The bottom line
Afterthoughts

National debt, income inequality, employment, and taxation

In the years following the crisis, we had a contradiction that was plain for anyone to see. National governments were struggling to pay their debts, while at the same time multinational corporations were making gigantic profits. In most countries, the wealth gap (the gap between rich and poor) had been steadily rising for decades (income inequality). But ordinary people in the middle and working classes were being asked to accept "austerity measures".

This is truth distortion and should be identified as such. If money is needed, the people who should pay first are those who have money. Where else is the money going to come from? Clearly, the rich are not being taxed enough. This is not a politically biased claim - it is merely a logical conclusion based on an objective appraisal of what is evidently the main problem. Governments should be taxing wealth more directly, in addition to income, and separately from it. We also urgently need transaction taxes (e.g. Tobin tax) to generate urgently needed taxation income and at the same time curb financial speculation, and we urgently need environmental taxes (e.g. carbon taxes) to combat global warming and other environmental problems. Regarding wealth tax, we need more transparency about the total wealth of individuals. Everyone with any net wealth (or at least those whose wealth exceeds a given threshold) should pay about one percent of that wealth to at least one national government every year (please sign the petition).

It is commonly believed that the rich have exclusive rights to their money. That is not entirely true. Like the banker in the game of "Monopoly", governments supply money to all members of society for general use; they also write the rules by which money is to be used. In a democracy, both the money supply and financial regulations are under democratic control.  It follows that the rich do not completely "own" their money. Some national constitutions state directly that  private proverty should ultimately promote the common good. From the German constitution (art.14, §2): "Eigentum verpflichtet. Sein Gebrauch soll zugleich dem Wohle der Allgemeinheit dienen". And the Bavarian constitution (art. 151, §1): "Die gesamte wirtschaftliche Tätigkeit dient dem Gemeinwohl, insbesonders der Gewährleistung eines menschenwürdigen Daseins für alle und der allmählichen Erhöhung der Lebenshaltung aller Volksschichten."

The financial crisis can be seen as a consequence of ignoring these fundamental ideals, or not taking them seriously enough. Taxation and redistribution of wealth are the main problems that we are facing, because the differences between rich and poor are often so absurdly large. Of course there are other problems, but these are the main ones, because when they are solved the others will disappear or be easier to solve. Those who put other issues at the top of the list are in denial about the main problem. Those who hide the taxation issue by pretending that other, more complicated, less transparent problems are the primary cause of the crisis, and those who are constantly diverting attention toward those complex issues, are distorting the truth and ultimately preventing a resolution of the problem.

What I am saying is not left-wing or right-wing. Demanding more tax from the rich is a left-wing thing to do, but I am also a big fan of free enterprise, which is a right-wing ideology. Ultimately, I am talking about rescuing the framework within which both left and right operate. That is the modern democratic system that we know and love, which is based on a balance between free enterprise and social security. This system is under threat and everyone is wondering what the solution might be.

To understand the crucial importance of taxing the rich, consider the question of unemployment. Modern capitalist societies have a big problem with unemployment, with no solution in sight. Unemployment is part of an appalling negative legacy that we are leaving to our children, along with climate change and national debts. The stories that we are being told about unemployment by economists, politicians and journalists are deliberately misleading. For example, they love to talk about the complex relationship between unemployment and inflation. The concepts are abstract and the discussions sound impressive. But there is no clear solution. That detracts attention from the real solution.

The main cause of unemployment is disarmingly simple. There is always a lot of work to do; for example, right now there is a lot of work to do developing alternative energy and helping the world give up its dependence on fossil fuels. And there are many other gigantic tasks awaiting our attention - the elimination of poverty is an obvious example. The problem is not the availability of work - it is the availability of money to pay the workers. As long as the wealth gap is far too big, the problem can be reduced to one of taxation. Our governments are not taxing the rich enough, so they don't have the money to pay people to do urgent work such as saving the planet for our children. You don't need an economics degree to understand that, nor do you need an economics degree to see that the problem could easily be solved by introducing of increasing wealth taxes. Right now, the money that should be in circulation so that it can be used to pay employees has instead got stuck in the assets of the rich, a large proportion of which has been parked in hedge funds and tax havens, doing nothing. 

Tens of trillions of dollars are stuck in this way because our governments are failing to enforce fundamental rules of capitalism. One of those rules says that everyone must honestly disclose their income and assets for taxation purposes. Another says that both income and wealth must be taxed. Another says that the more you earn or own, the more you pay in tax. These basic rules are not being respected. We are experiencing corruption at the highest level. Our governments are overtaxing the middle classes and small businesses, to compensate for undertaxing the rich. As a result, small and medium businesses cannot offer enough jobs to employ the workforce, and there you have it: unemployment. As long as a large proportion of the world's money is tied up in secret tax havens, there is never going to be enough money to pay wages to workers. If this money got back into circulation, unemployment figures would fall. The main cause of unemployment is the same as the main cause of the financial crisis: it is the failure of governments to tax the rich. 

Another solution to the unemployment problem is to eliminate the concept of "unemployment" altogether by introducing a universal basic income. The rich don't like that idea either, because it would simplify the taxation system, making it harder for them to manipulate it (more here). 

Six ways to distort the truth

You don't have to agree with me. But just imagine what would happen if the solution to the economic crisis were as simple as I am saying. Then you would expect people to agree on solutions and start to implement them. There have been some changes since 2008, but the main problems have not been solved. Evidently, the truth is being distorted. The example I gave on the theory of unemployment is one of many examples. What we are usually told about unemployment is not untrue, but it is a distortion of the truth. Since the consequences of such distortions are so enormous, it is worth having a careful look at the different ways people have been distorting the truth when talking about the finance crisis.

In 1975, Paul Simon considered different ways to destroy a relationship (“50 leave ways your lover”). Here, I consider six different ways to destroy our good, old-fashioned, honest system of free enterprise by distorting the truth: complexity, abstraction, bias, manipulation, secrecy, and nonsense.

Complexity. Everyone is talking about the complexity of the financial crisis. If there is indeed a simple solution, as I am claiming, some people must be suppressing it, either consciously or unconsciously. Who could those people be? They are most likely to be people who, in some way, are profiting from the crisis. I am not talking about a plot. Those who benefited from the crisis are not plotting. They are simply looking after their own interests, as everyone does in one way or another. One way to do that is to complicate things. That makes people feel important, as if they understand something that others do not. It also makes them feel comfortable, because the problem will not be solved as long as people don't understand it. The rich and those economists who support them (which is only natural, given that they are likely to earn more money that way) are right that there is a complex side to the crisis, but public awareness of this complexity will not lead to a solution. Instead, it will lead to confusion. I will argue on this page that we can reduce the problem to its main components. When we do so, it becomes rather simple. It is then possible to solve it completely and sustainably.

Abstraction. Another form of truth distortion is the unnecessary and misleading use of abstractions. Consider the "economy". According to Wikipedia, the economy is the economic systems of a country or other area; the labor, capital and land resources; and the manufacturing, production, trade, distribution, and consumption of goods and services of that area. Clearly, the economy is not a single "thing". We cannot touch it, and we cannot measure it (we can only measure aspects of it). It is an abstract concept, and for that reason theories about it (including its "speed") are generally speculative. Now imagine that you are talking to a friend about the financial crisis. You claim that the best way to solve the crisis is to increase taxes for the rich, while maintaining middle-class taxes at the present level. Your friend thinks that is a bad idea. Taxing the rich will slow down the economy, she says, which will increase unemployment. Everyone will suffer as a result. It is better to let the rich get richer, then they will have more money for all kinds of purposes (the "trickle down" theory). At first glance, that seems like a good answer. But there are other ways of speeding up the economy. One way is the exact opposite. The Robin Hood method is to tax the rich and give the money to the poor so they have more money to spend ("trickle up"). I am not claiming that that argument is correct, either. Both arguments are shaky, because they depend on many unpredictable variables. At this point, there is a temptation to descend into a theoretical discussion about relationships between abstract concepts. That's what economists and sociologists like to do, and I admire them for it. They are my academic colleagues, after all, and they know much more than I do about the details of this problem. But it is also possible that a detailed discussion will not help. In this case, what happens when we resist the temptation to consider economic theory and instead talk about concrete things? In that case we could ask simply: What is a healthy, happy economy? Who is healthy and happy in that case? The rich? The people on Wall St? Clearly, the main thing is not the "economy", it is the people. The philosopher Immanuel Kant famously observed that human beings should be treated as ends and not as means, and who could disagree with that? Our aim should be healthy, happy people, and we will never achieve that goal if the wealth gap is too big. That is why more wealth taxes are necessary. But, your friend replies, you don't understand. We have to speed up the economy to ensure economic growth, which as everybody knows is the foundation of any healthy economy. She is still talking in terms of abstract concepts, but you try to reply in a concrete way. You point out that economic growth cannot continue forever, because natural resoures are limited. In fact, we have already passed that limit (that's what the climate change debate is about). Unlike the economy, natural resources and global climate are very concrete things. So much for the growth argument. Here is a little tip: When people start talking about growth, don't be deceived. Just tell them that any argument based on growth must now be wrong and refuse to consider any strategy that involves growth. End of story. We need to consider other approaches.

Bias. When discussing these issues, it is important also to be aware of bias. Did you notice that your friend in the previous paragraph was biased toward the rich? She worried about taking money from the rich, but did not consider the economic role of the poor, let alone their rights. She forgot that if the poor have less money, they can't buy things and the "economy" slows. In the previous paragraph I also assumed that your friend was a middle-class person with no particular motivation to distort the truth about the financial crisis for her own benefit. If she had been rich, it would have been a different matter. When the rich complain about paying more tax and present complex economic arguments to justify not paying it, we should just ignore them, just as we would ignore anyone who is obviously biased. Of course most people want to avoid paying more tax and will try all kinds of methods to prevent that, including distortion of the truth. You can justify just about anything by quoting passages from the Bible, similarly, you can find an economic theory to justify just about anything. That does not mean it is true. But when rich people like Warren Buffett (but also many others) start talking about increasing wealth taxes, our ears should prick up. more

Manipulation. If the rich are asked to pay more tax, they may respond by manipulating public opinion. Since that is exactly what I am trying to do with this page, I should explain myself. I am not rich, so my means are limited; but I do have the advantage of a university education, which helps me to write internet pages like this. The wealthy are at a great advantage, because their contacts with individuals, colleagues, employees and media always depend on wealth. If they need someone who is good at writing, they can pay for it. One of their favorite narratives is the "rags-to-riches story". It is true that many famous people dragged themselves out of poverty by a combination of good ideas, hard work and good luck, in a context in which social security was almost non-existent. Think of Bob Marley. But the truth is that not anyone can do that, and the ones who did not succeed are not famous, so we cannot use them as examples. The least controllable factor is luck - being in the right place at the right time. Luck also includes the people with whom one interacts to get good ideas, and the motivation to work hard. It is a logical fallacy to conclude from examples like Marley that "anyone can make it". In fact, the probability that a person born in poverty will "make it" is very small, regardless of good ideas or hard work. The rich may or may not understand that, but that is not the point. The point is that they are generally good at looking after their interests (that's why they are rich), so they use their economic, social and political resources to spread such fallacies and justify the massive wealth gap. Another common form of manipulation is to claim that anyone on the left of centre is probably a communist who is plotting to take over the world and take away our freedom. Half a century after McCarthy we still have to deal with this nonsense. It would be equally ridiculous to claim that all rich people are Nazis.

Secrecy. Another way to distort the truth is secrecy, the opposite of transparency. Secrecy in financial matters can seriously undermine democracy. One form of secrecy that we are experiencing repeatedly in 2015 is secret negotiations between governments and corporations in an attempt to push through "free trade agreements", that would reduce market regulation instead of increasing it and make it possible for corporations to sue governments. Another, more traditional and equally dangerous form of financial secrecy is the tax haven. The Swiss bank secret is surely one of the greatest scandals of all time. For decades, dictators in developing countries have been extracting enormous sums of money from their own people, many of whom live in poverty, and hiding it in Swiss bank accounts - with the full knowledge of bank officials who are also making money out of the deal. Those bankers, politicians and economists in Switzerland and elsewhere who are responsible for perpetuating this corrupt system have all kinds of excuses and are generally treated with respect. What could be more outrageous than that? We urgently need more transparency in finance and taxation. The Scandinavian countries demonstrate the virtues of going to the other extreme. There, all taxation summaries are published (source). It is easy to see how much women are earning compared to men, or foreigners compared to locals. Cases of discrimination become visible and can be addressed. No wonder there is less racism and sexism in Scandinavia. Moreover, it more difficult to evade or avoid tax, especially for the rich. It is true that the high taxes and the difficulty of cheating the system have caused some rich people to move abroad. But most of them have stayed because they are proud of this system. They are proud to live in a country with good social services. From this example it is clear on the one hand that any country can unilaterally increase transparency and wealth taxes without worrying about the rich suddenly leaving the country. On the other hand there is still an urgent need for international agreements about wealth tax to stop people shifting their assets from one country to another to avoid tax, which should be an election issue in all countries. And it's not a question of how much we should tolerate tax havens and tax secrecy. There is never any plausible justification for these things. By democratic means we can and should get rid of them altogether. more

Nonsense. The final kind of truth distortion on my list is outright nonsense. Allow me to explain with a little story. I live in Austria; Switzerland is right next door. In the past year or two, I have read some astounding statements by moderate Austrian politicians in a leading Austrian newspaper with an economic focus (Der Standard). They claimed that new wealth taxes would not be worth the trouble, given the relatively small amount of income they would generate for the government. This claim was supported by a calculation in which a small number of wealthy people were hypothetically asked to pay a small amount of wealth tax. And that was it. That is a beautiful example of truth distortion, but because this kind of argument is so obviously wrong, I prefer to call it nonsense. You might as well say that the wealthy don't have much money, or that they don't have more money than other people. Austria has a population of 8 million people, of whom 20 individuals have assets exceeding one billion Euros each and 100 have assets exceeding one hundred million Euros each (source). Altogether, there are 74 000 millionaires in Austria. Rich Austrians have 320 tons of gold in the bank; the government, 280 tons. And the rich are getting richer (source). In the same country, amid all of this wealth, 5% of the population is living in "acute poverty" (source). The story is similar in other industrial countries, with the exception of the USA where the rich are even richer and poor are even poorer - and we haven't even started to talk about the developing countries. This is the context in which a well-dressed, mild-mannered, and widely respected moderate politician was claiming that wealth tax would not generate enough government income to make its introduction worthwhile. Would you buy a used car from this man?

So there we have it: six tried and tested ways to distort the truth about the global financial system, how to spot them, and how to argue against them. I feel qualified to talk about this topic, because the search for "truth" (whatever that means) is my expertise and my daily life. In my research, I write articles for research journals, review submissions to the same journals by other people (evaluating their "truth content"), and (as an editor) develop procedures for reviewing submissions to journals (example). In my teaching, I help students improve their ability to think clearly and critically (more), and I evaluate their performance in examinations. All of this is not happening in an "ivory tower", because the people I am interacting with in research and teaching are also out there in the "real world" doing all kinds of things. In this way, the universities of the world are promoting clear thinking in the general population. That is a fundamental cornerstone of democracy, because if people don't understand political issues, how can they vote on them? Clear, critical thinking is what we need most of all to solve apparently complex problems like the global financial crisis. That's why governments and big corporations sometimes feel threatened by universities and try to reduce their funding. The universities act indirectly like watchdogs and whisteblowers.

Clear thinking does not mean generating complex theories that no-one understands (sometimes not even the people who write them seem to understand them). Contrary to popular belief, that is not what universities are about. Clear thinking is generally about isolating the main point (or points) and separating it (or them) from side-issues (more). After that, it is about understanding relationships between the main point and the side issues. As I have explained above, the main issue to be addressed in the global financial crisis is taxation. By comparison, everything else is secondary. No amount of creative, adventurous truth distortion can change that.

Anyone for a free lunch?

As everyone knows, there is no such thing as a free lunch (more). When I was living in Australia in the 1980s, I often heard that said when the right was complaining about the left. Their favorite economic scapegoat was a species of welfare recipient commonly known as the "dole bludger". Dole bludging is indeed a problem, and I have addressed it in detail elsewhere.

It may have been unfair to scapegoat the dole bludgers, when plenty of others could have been blamed for the economic problems of the time. But the general principle was correct. There is indeed no such thing as a free lunch. On this page I am sending that message right back to those people who taught it to me, return to sender.

In recent years, it has unfortunately been the right that has been dominating attempts to get a free lunch. They have done so in various ways, including political pressure to reduce taxes for higher earners, evasion and avoidance of existing taxes, and dodgy forms of investment and speculation which, according to the principles I have outlined (or will outline below), should be illegal (e.g. derivatives, futures trading, short selling, subprime lending). We are talking about many more free lunches than those dole bludgers ever imagined - with much nicer food and wine. But it gets worse. In the USA, Republican governments have consistently borrowed more money from the private sector than Democrat governments, and generated bigger national debts - which soundly contradicts what right-wingers generally claim and most people seem to believe (source). According to Wikipedia, the five former Democratic presidents (Bill Clinton, Jimmy Carter, Lyndon B. Johnson, John F. Kennedy, and Harry S. Truman) all reduced public debt as a share of GDP, while the last four Republican presidents (George W. Bush, George H. W. Bush, Ronald Reagan, and Gerald Ford) all increased it. All of them, one after the other. Incidentally, it is easier for the USA to go into debt than it is for other countries, because US dollars are accepted worldwide as a kind of global currency. Lenders don't care so much about the ability of the USA to pay its debts by demonstrating its currency reserves. US cash is accepted almost everywhere, which is why there is so much of it (half a trillion, apparently). All of this is a kind of massive free lunch: just print the money and spend it, and pass the debt onto the world's children.

The financial crisis was caused by banks lending money that doesn't exist, and earning interest on it. Unfortunately, they didn't have the advantage that the US Federal Reserve enjoys. The bursting of the bubble showed there is indeed no such thing as a free lunch (in case we had not learned already). One wonders what will happen when the US-national-debt-bubble bursts. Or more like it, when the bubble represented by the complex interaction between global economy and global climate bursts, because people are not paying the real price of greenhouse gas production and other forms of pollution, but instead passing the bill to future generations. Some kind of global collapse toward the middle or end of this century seems preprogrammed (or it might last from the middle to the end). When it comes, it will make the 2007 crisis look like peanuts. more

The end of national debt

In recent decades we have grown so used to national debts that we think they are normal. And of course national debts have their positive side. In the decades following the second world war, many countries ran up debts in order to improve their infrastructures, which ended up improving the quality of life for everyone. These were great achievements, but what most people forget is that every time a government borrows money from its own people (usually in the form of government bonds), that goverment is missing a chance to tax the people. Said another way, those politicians are too chicken to ask the people who voted for them to finance the projects that will benefit those people. Taxation is generally preferable to borrowing for the simple reason that after the taxation is collected, the transaction is closed and complete. When money is borrowed, it has to be paid back, and in the case of national debts the people who are going to pay back are our children. It's like having a great time going on wild holidays, buying expensive things and so on, and then expecting our children to pay our credit card bills. National debts are the opposite of leaving our wealth to our children. National debts mean asking our children to pay our debts.

When politicians borrow money for their country from private sources, they are obliging future generations to pay it back. But future generations are not consulted, nor are they generally very happy about paying other people's debts. If someone asks me to pay their debts, I am not happy about it. Why should future generations be happy about it? According to simple democratic principles, this widespread practice should be illegal. Future generations have rights (more).

What's wrong with left-wing governments selling goverrnment bonds to finance infrastructure and welfare? This happened in many countries in the 1960s and 1970s, for example. The benefits were very clear, and in many cases we are still enjoying them (I am thinking in particular of Austria). Schools and universities were improved so children and young adults got a betterr education; one could argue that this helped them to later pay back the national debt (or at least to pay the interest on it). Borrowing by selling bonds allows the government to boost the economy and increase economic growth (but growth raises interesting questions about sustainability, see below). The main point I want to make is that improvements of this kind can equally be financed by taxing the rich, and if governments at that time had done that, they would not have generated such large debts. They many not have generated any debts at all. Similarly, right-wing governments should not borrow from their own people to finance tax breaks for the rich and military adventures. In  both cases, we have a choice between asking today's rich or tomorrow's middle class to pay the bill. Because we are too chicken to challenge the rich, we pass the bill to tomorrow's middle class, which means today's children. We then claim to have found a "realistic" solution.

The idea that developing countries should not be loaded with debt is well known (more). Since developing countries are still being offered loans (e.g. China is offering loans to African countries), this is still an important issue. What I am saying here is that this principle is not confined to developing countries. Instead I am saying that no country at all should have debts. If a country's taxation office has reliable information about the income and assets of its citizens (which unfortunately is not the case as long as tax havens exist), then it should never be necessary for a country to go into debt. Instead, the income from taxation should be spent on the most important things. After that, government spending should stop, or taxes should rise. One or the other.

If a country does not have enough money to meet its genuine needs, the main solution is taxation. Someone has to pay the bill! There is no such thing as a free lunch! (Did I say that already?) And given that the wealth gap is far too wide in all countries, this generally means increasing taxation for the rich, because that is where most of the money is. The middle classes may seem to have a lot of wealth, but often they spend their entire monthy income every month, so there is none left. Moreover, they often pay a mortgage on a house that they do not own, or only partly own.

Another method is to print more money, which causes inflation. That effectively reduces the assets of the rich. By using this artificially created money (in fact money is always artificially created) to improve social services, the wealth gap is reduced. In the end, this method would be similar to taxing the rich. When confronted with this idea, the rich just laugh and make jokes about how economically irresponsible it is to print more money, noting (correctly) that there is no such thing as a free lunch. In fact, when you consider the main points and don't allow yourself to be sidetracked by unclear economic theory, printing more money is a reliable method of redistributing a country's wealth, provided the rich don't convert their wealth to other currencies in advance. You don't need an economics degree to understand that. But it is more honest and direct to tax the rich directly. Even the rich would agree with that. Of course international exchange is a problem, but that is also a problem with wealth tax. In both cases international agreements are needed.

What about borrowing to invest in the future? First of all, economic growth in industrial countries has to stop if we are going to save the planet for our children. There are clear relationships between growth and emissions, and between wealth and emissions. I am talking about austerity for the rich here, because the more familiar form of austerity increases the rate of poverty which is unnecessary and unacceptable. Second, if you can improve state revenue by borrowing, you can also improve it by taxation. If people have extra money lying around that they can lend to the government, they can also pay more tax. The increasing wealth tax is an opportunity for governments to generate more revenue from wealth taxes.

Capital flight is a problem, of course. National states are cutting taxes that affect the rich in order to stop them taking it elsewhere. The solution is to globalise taxes that primarily affect the rich such as wealth, inheritance, environment and transaction taxes. This is true regardless of what I have written about national debts. The reason these international agreements are not happening is because our governments are not democratic enough. The rich have too much influence. This seems like a Catch-22 situation, but the problem can be solved if people have the courage to state simple economic and moral truths, as I am trying to do on this page.

That national debts are problematic is clear from their history. It all started when English monarchs needed money to fight wars, and still today that is an important function of national debts. George W. Bush could never have fought his catastrophic war against Iraq in 2003 without enormously increasingly US national debt. If he had been required by law to present a war budget to congress with all expected income and expenses (and it had to include all expenses otherwise there would suddenly be no money) then there would surely have been no invasion of Iraq. No-one would have agreed to cough up a trillion dollars for such a risky and poorly justified proposal, even if we ignore the fact that it was also destined to kill at least 100 000 people.

A common argument is that national debts are a cushion against changing fortunes. The debt can be increased in bad times and reduced in good times. The rich like that argument, because it means the middle classes can pay the debts in good times while they are free to increase their wealth on global markets. Without national debts the rich would be called upon to give up some of their wealth in bad times. Another argument is that if individuals are allowed to borrow to buy houses, then why shouldn't the government borrow to build infrastructures? The answer to this question is that you can't compare individuals with governments. They have quite different functions in the economic system. Governments create money; individuals play with it. These two functions should be clearly separated.

The nature of money

The financial crisis of 2008 taught us that there is something fundamentally wrong with the global financial system. But there is not much agreement about what the problem is, let alone the solution. Economists like to make things complicated, with the result that no one really understands in the end. In a democracy, that means that in the end nothing changes. That's why climate deniers have been spreading confusion about climate change - they know that when there is disagreement, a clear decision to act is unlikely. For a theory of any kind to work in a democratic context, a majority of people have to understand it. It follows that simple theories are generally preferable to complex theories, other things being equal.

With that in mind, we need to go back to basics and think about what money is and how it works. If we do that, we see that the solution is to simplify and clarify the economic system, in the ways that I have described. That can solve a host of economic problems, and do so sustainably. But we will have to fight for that, because there are a lot of rich people out there who make their money out of the unnecessary complexity and inherent faults in the system. And they have no intention of stopping doing that. They seem to think they have the right to rip everybody off by exploiting loopholes. If we are going to stop them doing that, we will have to agree first about how the system works, or should work.

The twin goals of an economic system are, or should be, to promote prosperity and eliminate poverty. In economics, people often talk about the greatest good for the greatest number (the utilitarian principle). In the end, it comes down to human rights, and I want to focus on two of those rights. First, everyone has the right to own property, which is linked to the obligation to pay reasonable taxes on that property. Second, everyone has the right to freedom from poverty, which is linked to the obligation to make a positive contribution to society, depending on one's abilities and possibilities. The principles are firmly enshrined in international law, yet to my knowledge, no economic system has achieved these two goals simultaneously. Yet in principle this should be easy to do. The first step would be to agree that this is a worthwhile goal.

Redistribution is fundamental. Anyone who has ever played the board game of Monopoly understands this principle. If you don't redistribute wealth, some people will fall into poverty, and when they do, it is very hard for them to get out again. In the board game, they simply lose and the game stops, but in real life, the game must continue. In a globalised economy, redistribution must also be globalised. That is an essential prerequisite for eliminating poverty. The more people make their fortunes out of globalised economic systems, the more urgent globalised systems of redistribution are becoming. Development aid is not charity or an act of generosity - it is essential for the long-term survival of global markets.

The solution, then, is to adjust the level of redistribution at all levels - local, regional, national, global - until poverty is eliminated. It's simply a matter of doing the mathematics, and this mathematics has been done, many times in many ways. That is why most rich countries promised two decades ago to spend 0.7% of GNP on official  development aid. On average, they are only spending about half of that. So it is not surprising that poverty is still a big problem. In fact, depending on definition, a billion people are still living in poverty.

The separation of public and private

The separation of the public and private sectors must be absolutely clear, just like the separation of church and state in modern democracies, because the public and private sectors have quite different functions. When they get confused, we end up with corruption. This may explain the increase in the rate and size financial scandals in democratic governments in recent years.

Our economic system is originally based on the idea that the public sector creates the money and the private sector plays with it. The system only works well when laws are in place to prevent the reverse from happening, namely the public sector playing with money and the private sector creating it. The government has no need to go into debt, and indeed it should never go into debt. This seems like a radical proposal, but it follows directly from the economic foundations that I have formulated.

Governments create money by simply declaring that it exists. If a government creates more money, the value of the money decreases, which is called inflation. They don't do that very often, because  it reduces the wealth of the rich, which they don't like. Not surprisingly, the economic behavior of governments is often determined by the rich pulling strings in the background. In response to inflation, or the threat of inflation, the rich might transfer their money to another country where the government is less likely to cause inflation by creating money. Governments try to avoid that.

An important aspect of "playing with money" in the private sector is going into debt to finance a new project in the expectation that the project will pay off the debt, and more. This is what private players are doing all the time, and you could say it is the foundation of capitalism. It enables anyone with the right combination of luck, good ideas and hard work to get rich. If people are highly motivated to do that, the result should be prosperity for a large proportion of the population, and indeed this is what often happens. Capitalism has been very successful in this regard.

It follows from the principle of separating public from private that the public sector must be completely prevented from playing this capitalist game, by law. In other words, national debts should be illegal. And laws, incidentally, are an essential part of any economic system. Laws sound threatening sometimes, but no capitalist system can work without them. So it is important to be clear about the most important economic laws at the highest level. 

National debt happens when the government borrows money from the private sector to finance a project that a politician has promised to the public. The politician wants to be reelected, so the project has to be financed. The politician could finance the project by taxing the rich, but s/he doesn't want to lose their support. So instead the burden of payment is shifted to the future. Our children are expected to pay it back. They have no say in the matter and don't realise what is happening so there is not much they can do about it. 

If you are wondering why our children feel like they have no future, there are several reasons, and that is one of them. Any parent who votes for a political party that is in favor of increasing national debts or opposed to decreasing them is committing this crime against their children, or against all children. 

This is not a plea to vote for the political right, by the way. Parties on the right of centre often talk about reducing national debts, but fail to deliver. National debts have been steadily increasing relative to national productivity since the second world war. During that time in the USA, right-wing governments (the Republicans) have consistently increased national debts and left-wing governments (the Democrats) have consistently reduced them. On the surface that is because the Republicans fought expensive wars and cut taxes for the rich. Another reason is that national debts benefit the creditors, who earn interest from them. This money is ultimately paid by the taxpayers. The creditors tend to get more money, the taxpayers less. National debts end up being redistribution in the wrong direction.

Governments could easily function without debts. Every year there would be a budget with income and expenditure. The budget would have to balance, because money doesn't come from nowhere unless the government creates it, and as we have seen the rich are not keen on that idea. If the people of a country or electorate want a project or a service, they would have to be willing to pay for all of it through taxes. If they didn't think it was worth it, they would have the option of voting for the party that represents their opinion.

National debts are like borrowing from our children. The first step toward solving the problem is to repeat that statement again and again until it sinks in. After that, it should be easy to argue that national debts should be illegal. You cannot borrow money from someone who doesn't even realise you are borrowing it. That is a form of theft. Stealing from the next generation is like a human rights violation. Children have rights, and one of those rights is the right not to have to pay their parents' debts.

A counterargument is that in the future, our children will enjoy the infrastructures that we have created for them. But many infrastructures are problematic due to their unsustainable carbon footprints - a motorway is a good example. Such infrastructures are gradually destroying the planet for our children, and at the same time forcing them to pay our debts. Thus, there is a connection between national debts and children's rights. We have no right to expect our children to pay our debts. National debts should therefore be illegal.


The function of banks

Another aspect of the fundamentals of economics is the function of banks, which is to enable the capitalist game (described above) to happen by borrowing and lending money, and by paying and charging interest. When you ask the bank to look after your money, the bank gives you interest. The bank then lends your money to other people. In both cases, the interest rates are determined by negotiation, and different banks compete with each other to provide the best rates. Banks cover their costs by the difference between interest rates for borrowing and lending,  which incidentally makes all other fees unnecessary.

Everyone knows that banks basically work in this way. My point is that they should only work in this way. They should not be allowed to behave like public institutions with the ability to create money. In other words they should be legally prevented from lending money that they do not have. Generally, banks (should) belong neither to the public nor to the private sector. Their function is to mediate between the two, and what they are allowed to do is controlled by law. 

 In Wikipedia you can read that a bank connects customers that have capital deficits to customers with capital surpluses. In the good old days, banks got their money from individuals who deposited their money in accounts. The bank then lent this same money to other people and demanded interest. The depositors got part of this interest and the difference was used to finance the bank. When the total amount of lent money approached the amount of deposited money, no more money was lent. All I am saying is that the banks should go back to providing this essential service. All loans should be completely secured. No risk. Housing should only be financed if the finance is available. A "housing bubble" would then be impossible. In fact, economic bubbles in general would become history. Trade would be based on "intrinsic value", not "inflated value": There would be no "bubble" that could "burst". 

Similarly, credit cards should be replaced by debit cards. Not a bad idea, given that many people are dragging around credit card debts that they cannot pay. Like governments, they should learn only to buy what they can afford, and the credit card companies should stop making money out of people's inability to control their consumerism. Instead, we need those credit card companies to do the work of good old-fashioned banks. Or to engage in honest free enterprise, producing good ideas and products. For their part, the banks should stop playing God on global markets, and return to their original calling of serving depositors and borrowers. Please note that I am not opposed to mortgages on houses, provided that the money being lent by banks exists and the banks go through the usual procedure of checking the client's ability to repay the debt.

I am talking about the end of fractional reserve banking. All bank loans should be covered 100% by reserves. Risk should be zero, by law. That would mean the end of bubbles that someday burst. Nor should banks behave like private institutions with the ability to play financial games in the market place. I am talking about the end of investment banking, a term that contains within it a contradiction. Banks do not invest. Private players invest. Banks borrow and lend money, and that's it.

People on the political left are united in their desire to reduce or eliminate poverty and to promote human rights. What I'm saying is that many of these goals can be achieved by radically clarifying and simplifying our most basic economic laws and institutions. After that, there will be no need for a communist revolution. There will be no need to regard capitalism as fundamentally evil. In fact, capitalism is the foundation of our prosperity, provided it is appropriately regulated. The problem is not to get rid of or to water down capitalism, the problem is to regulate it properly, to clarify the functions of its most fundamental institutions, and to educate the public about what these fundamental institutions can and cannot do.

Economists will say that you cannot prevent banks or private individuals from making private agreements that effectively increase or change the amount of money that is in circulation. There have always been agreements of this kind, and derivatives, subprime trading, futures and so on are merely examples. But it is possible for the state to gradually withdraw legal support for such agreements. Without legal security, such agreements would become less common.

Regarding regulation: it has been clear since 2008 that we need more and stronger market regulation, and not less. The content of the regulation should be autonomously determined by democratically elected governments. Seven years later, in 2015, governments are being bombarded by a wave of "free trade agreement" proposals that would do exactly the opposite: reduce government regulation. If we wanted another global financial crisis, this would be the best way to achieve it. The insanity of the "free trade agreement" movement is plain to seen, yet thousands of "experts" the world over are working hard to implement TTIP, CETA, TiSA and so on. This is an extremely dangerous form of truth distortion. The consequences for our children and grandchildren, and for developing countries in particular, will be catastrophic if these "free trade agreements" are accepted - just as the consequences of global warming will be catastrophic if there are no radical global energy reforms in the coming years.

Concrete steps toward sustainable recovery

Given these arguments, how can we move toward a more stable and fair financial system? The problem will not be solved by complicated economic theories. Besides, the problem is not only economic - it is also historical, psychological, ethical, and legal. The following steps could be part of a simple, transparent, practical solution:

1. Pay off existing national debts. This involves first establishing which debts were legal in the first place, because only they should be paid. In many cases, legal investigations will be necessary. These should happen in independent procedures within each country. If a debt is found to be illegal, it should be canceled. Having established which debts are legal, they should be paid off, slowly but surely. Since the wealth gap is currently far too wide, that should primarily be achieved by increasing taxes paid by the rich.

Incidentally, a large part of the current Greek national debt could be paid off by a combination of taxation and EU assistance. Regarding tax, rich Greeks apparently have some 200 billion Euros in secret Swiss bank accounts. I propose that all wealth anywhere be taxed at a flat rate of 1% (more), but if one's country is facing bankrupcy 5% would be more reasonable. To enable this to happen, tax havens must urgently be phased out by international agreement; we must also urgently clarify why this is not happening (it appears that politicians from all over the world are in bed with rich people with secret bank accounts - or have them such accounts themselves). Regarding EU assistance, why has the EU given trillions since 2008 to bail out corrupt banks, but is prepared to give relatively little to the Greek people? They may not be entirely innocent, but who is? They are certainly not responsible for a global crisis that, as everybody knows, was jointly created by banks, corporations, governments, and those economists who could have warned them, but did not. It is undemocratic to treat the inventors of δημοκρατία as scapegoats while the guilty live in luxury. Perhaps the Greeks would be better off leaving the EU and regaining control of their currency.

2. Make it illegal for governments to borrow money. Just repeating: National debts oblige future generations to repay them or to pay interest on them. But we have no right to force future generations to do anything, just as we have no right to reduce their quality of life through global warming. Moreover, if a sovereign nation has control over its own money supply and taxation system it has no need to borrow from private sources. Its income is based on taxation. If there is not enough money for a given project this year, it can be financed next year through taxation in the yearly budget system. If a majority of voters are opposed to the project, they will elect a new representative who stops the project and the extra tax will be dropped. That's how democracy works! Ultimately, the people are in control, not the international banks and corporations. Further information: link

For many people that is the most surprising assertion in this text, and it certainly surprised me when I learned about it. But this idea is surely perfectly clear and indisputable. What right do we have to borrow from future generations? None at all. What right do politicians have to give away a portion of the autonomy of their democratically elected successors? None at all.

The only exception to this principle would be the financing of large public infrastructure projects that will clearly benefit future generations, even in times of climate change. A good example is the tunnel between France and England, but not regular freeways if they will then lead to an increase carbon dioxide emissions at the expense of future generations. Another example is the expenses of fighting a war that is clearly defensive and not offensive. The trillions spent by the USA in the Gulf War from 2003 do not fall into this category! To prevent mistakes of that kind, this principle would require a solid legal foundation.

Even then one could argue that governments should never borrow money, under any circumstances. It is already clear that the climate experienced by our grandchildren will be rather different from now, and that the change will cause widespread destruction and suffering. The least we can do is give them infrastructure. 

3. Make it illegal for banks to lend money that they do not have.I expect that most bankers and economists would object to this point, and present me with a cascade of impressive sounding economic arguments. But the problem is not economic, it is moral. Lending money that you don't have is a form of lying. It is also a form of gambling. In a rational, caring society, lying and gambling should be illegal. Fractional reserve banking is remarkably similar to crimes such as fraud and counterfeiting. A bank's reserve should not be 5% or 10% or 20% of the money it is lending, it should be 100%, otherwise there is no money to lend. No wonder the economic system is in crisis. For further information look at the last few minutes of this video.

The banks that were bailed out by national governments to the tune of billions of Euros of public money in the years following 2007 should have been temporarily nationalised. Their CEOs should have been temporarily (but also indefinitely, depending on the fulfilment of strict conditions) replaced by democratically elected representatives. The conditions should have included those suggested on this page plus new taxes such as transaction and wealth taxes. Since hardly any of these things have happened, although some of them were promised, it is clear that our "democratically elected" governments are corrupted by their relationship to the banks. The enormous profits of certain banks and investors were indirectly financed by taxpayers. They played a dangerous game, and got away with it. We risk global financial collapse if the problem is not solved.

4. Make a clearer separation  between government and business. The principle of separation of state and religion (laïcité) is well-known. Religious leaders have no place in government, and government leaders have no place in religion. Citizens should be free to pursue any religion insofar as their beliefs, statements or activities do not contravene human rights. The world would be a better place if the separation of state and religion was made clearer in countries like the USA, Israel  or Iran. Another example of separation is the independence of central banks from both the public and private sector. Central banks determine how much money there is. They also set interest rates, which influence the interest rates of other banks. Neither governments nor businesses have the right or opportunity to interfere, but they may give advice and recommendations on long-term policy. Separation of government and business also means clarification of who makes laws and who obey them. Laws are made by democratically elected governments. These laws include regulation of markets. The last thing we need are "free trade agreements" that make it possible for corporations to sue governments for loss of profits. That would be a big step away from democracy and toward barbarism.

These are examples of the well-known principle that people who make important decisions should not have conflicts of interest that would influence those decisions. As an academic, I am familiar with how this principle works when articles are submitted for publication in academic journals. The reviewers should be asked to declare that they have no conflict of interest; if there is a conflict, other reviewers should be found. If the editor has a conflict of interest, she or he should ask someone else to manage the submission.

The most important place to avoid conflicts of interest is in politics. A politician who stands to gain personally from a given decision should not be allowed to participate in that decision. In particular, if the politician stands to gain or lose a large amount of money depending on the outcome of a decision process, she or he should be excluded from that process. 

If we want to tax the rich fairly, we must ensure that the politicians who make decisions about such taxes are not rich themselves. This is a centrally important question, because taxing the rich fairly is one of the main things that need to be done to repair our economic system. For the same reasons, politicians should not have close personal ties with rich people, nor should they simultaneously be involved in the running of businesses, directly or indirectly. Otherwise, they are highly susceptible to corruption. Of course corruption is a larger problem than this, and it often does not involve rich people (anyone can be bribed). But we should be pursuing all avenues to eliminate corruption in all countries. In general, we need a clear separation between politics and big business, just as we need a clear separation between state and religion.

Some people will think this sounds like a "communist" idea (whatever that means exactly), but in fact it has nothing to do with communism. I am not questioning the right of the rich to amass wealth, provided they pay their fair share of taxes as determined by an open and fair democratic process. I am merely questioning the right of the rich to enter politics. When citizens vote for politicians in elections, they need to know in advance that those politicians do not have serious conflicts of interest. The most serious of all such conflicts is money. 

It follows that anyone standing for any government office, whether democratically elected or not, should be required to declare their assets. If their wealth exceeds a given margin (say, 10 million USD, or in an ideal world just one million, which is surely enough to live on!), they should be prohibited by law from standing for office. If they decided to solve the problem by giving money away, there would need to be an investigation to ensure that the money was freely given with no strings attached. If this principle was pursued carefully, we might have a chance of taxing the rich fairly, and saving our capitalist system from the self-destruction toward which it is currently headed.

The bottom line

We need a new moral culture in which the rich consider it to be a privilege to pay large amounts of tax and put pressure on each other to pay their share. A general understanding that excessive wealth threatens democracy, so wealth is something special that implies responsibility. Wealth as something that only special people have, who must therefore use it wisely. An awareness that wealth is not forever, because if times are bad, the first to pay up will be the rich. This change of attitude will not happen quickly, but if there is a general change in attitude toward debts, it can happen slowly.

In a rational, caring society, everybody's total declared income, and the tax they paid on it every year, would be public knowledge. You could look it up for anyone including your friends and family,  your boss or employees. The same would apply to the total assets or debt of each individual, and the income, assets or debt, and tax payments or subsidies of every company. This would put the rich under constant scrutiny; they would be expected to justify their high income or high assets. In this situation, the rich would have no choice but to support an equal, fair system of taxation  and wealth redistribution. They would have no choice but to support high levels of tax on income, wealth, inheritance, environment, and transactions. They would support global harmonization of such taxes to avoid capital flight and the race to the bottom. They could not reasonably refuse to accept stiff penalties for tax dishonesty and injustice. They might even deliberately pay more tax than required, because they are proud of their country (or even just proud to be human). For them, it would be an honour to pay high rates of tax. They would see the opportunity to make contributions that really make a difference to their country and the world. That would be a just and appropriate reward for their good ideas and hard work.

More generally, we need to put an end to buy-now-pay-later mentality. At the moment many people are thinking: "buy now pay later" is ok and normal, because the government is doing it. They are our role models. Moreover, retailers are repeatedly suggesting it in their advertisements. But the 2008 financial crisis taught us that buy now pay later not ok. In fact, it is a major cause of poverty: many people get addicted to shopping and spend years trying to pay off their credit card debt. At the same time, when people buy things they don't really need it's bad for the environment. In the end, the ones who will really "pay later" are our children. They will have to pay our debts, and they will have to pay for the consequences of climate change. Perhaps advertisements by retailers encouraging people to buy now and pay later should be legally restricted?

In an age of global warming it's time to return to some old fashioned values. One of those is the value of possessions. If you want something important you work for it until you pay for it. You don't throw it away as soon as the next model is released. Buying a house is an obvious exception: it is a basic need, and young families usually have no choice but to go into debt to buy a house. That's one of the few good reasons why we have banks. As I have explained, banks should only lend money that exists in their reserves.

The monetary system is, or should be, created, owned and controlled by democratic nations. Private companies are free to use it, but not to control it. Sovereign nations, not banks, must remain in control of the money supply. If we accept that principle, it follows that sovereign nations should never pay interest on debts to the private sector, except for projects that clearly benefit future generations. Government is financed by taxes, not loans.

At the moment we have a situation where banks and governments share control over the money supply. In general, lenders have control over borrowers. So banks that lend money to governments also have control over them. People think they are living in a democracy because they vote for politicians in elections, but what actually happens after that is often determined behind the scenes by big banks and corporations. This is a familiar problem, and what I am trying to say on this page is that there is a practical and feasible solution. The current system of fractional reserve banking means that not only nations but also banks contribute to the money supply. As a result, the broad money supply of the nation is greater than the base money created by the nation's central bank - a bit like printing extra money when you need it. This practice must be stopped. Control over the money supply must be returned to the people, as represented by the national central banks. Private banks have no business meddling with the money supply. I thank Bill Still for having made this point so clearly and forcefully.

If we follow the above steps - and the transition will be easier than it appears, provided that existing, legally sound contracts are respected - we will be promoting free enterprise. In free enterprise, there are many legitimate ways to make money, but they can generally be reduced to two categories: good ideas and hard work. Both good ideas and hard work generally benefit society, which is why free enterprise has been such a successful idea. Once you have money, you can lend it to people and demand interest, at which point we are starting to talk about capitalism. Capitalists rely on the legal system to ensure that they get their money back. (Those who complain about regulation are not going to complain about that kind of regulation!) If you are a bank, you can look after money for some people while at the same time lending that same money to others. The money supply is under the control of a democratically elected government. A legal system is in place that prevents people from tricking each other. The law prevents fraud, money laundering, phishing, political corruption. It also prevents suppression of competition by monopolies. Legal regulation is an integral part of free enterprise. The market crash of 2008 proved the advantages of regulation: countries with stricter banking regulations such as India and Canada suffered less. By restricting freedom, regulations paradoxically make the system more free.

The law should generally prevent trickery. Democracy only works if voters understand the issues, so political honesty is an essential ingredient. The law should prevent people and banks from lending money they don't have, in order to make money on the interest; and it should prevent governments from borrowing from private sources, because they don't have the courage to tax the people who voted for them. Borrowing from the future is like taking money from babies, obliging them to pay it back they grow up. Don't worry about those babies, they won't object! That's not free enterprise, that's cowardice. I am also saying that we need a healthier attitude to taxation. Rich capitalists think they "made" their money. But money is not "made" by individuals, it is "made" by governments, and society is the ultimate source of any wealth. Paying back in the form of taxation is and always was a part of the deal, and deals are an important part of free enterprise. Right? So don't act like you're surprised or offended or something when the tax collector comes along, and don't waste your valuable time on tricks to avoid or evade tax. Instead, devote your time and money to generating good ideas and good products.

That sounds promising, but I have not finished yet. This approach would also eliminate dependence on growth. It has been clear for decades that national economies cannot continue to grow forever, if only for ecological reasons. We are reaching the limit of our natural resources. So economic theories that continue to rely on growth are dinosaurs. We must give them up and plan for a future without growth. But people are still talking about growth, because growth makes it is possible to lend money that one does not have, and borrow money from the future. Growth enables such virtual debts to be repaid. Obviously, this time-honored idea is no longer working. It may be painful to give it up, but we will have to do it.

Governments are local or regional, but money is increasingly global. One of the most difficult challenges facing the humanity today is the establishment of a democratically controlled global financial infrastructure that can enforce the principles that I have set out at a global level. An important task of such an infrastructure would be to ensure that rich individuals and transnational corporations are taxed in a fair and open manner, and the taxation is fairly distributed among national economies. Another task would be to make transnational corporations more democratically accountable, intervening to prevent practices, policies or decisions that contradict the will of the people in affected areas. Take for example those transnational oil companies operating in the Niger delta in Nigeria amid poverty, pollution and human rights abuses (source). NGOs can direct attention to problems of this magnitude, but they cannot solve them. And there are countless such examples in different countries. At the moment, transnational corporations exist to increase shareholder wealth, and they often do so at the expense of nation states, the environment and human rights. They are increasingly in control of global wealth and decreasingly under democratic control. This process must be reversed. The global democratic infrastructure that I am talking about would on the one hand stop countries competing with each other to create the best conditions to attract investments/money (low taxes for big corporations, cheap labour, few environmental constraints, ignoring human rights violations) and on the other hand control the activities of transnational corporations directly. That would allow both countries and corporations to return to the basic principles of free enterprise, competing to produce the best ideas and the best products for the benefit of the planet.

Public information is an essential component of democracy. Voters must be informed about issues that affect them. The necessity for a new global financial infrastructure that controls transnational corporations is one such issue, and it must become a political issue in all countries. We must elect politicians who are working toward this goal and developing realistic long-term solutions at a global level. If we are going to sustainably resolve the economic crisis, we must also inform ourselves about relevant economic principles and theory. We need economists who are demonstrably independent of financial and political forces, and who are good at explaining basic concepts without recourse to jargon. Economists who understand the difference between a main point and a side issue, and who refuse to entertain speculative, populist, or politically biased theories. Economists who care about the world and all people regardless of their situation.

Afterthoughts

I am  lucky enough to belong to the "upper middle class". I enjoy a permanent full-time wage as a university professor, which is taxed in the usual way. I can afford a house, children, travel, and donations to charities. I wish that more people could enjoy these things. That's is the motivation for this text.

Like Sam Cooke in the song "Wonderful World", I don't know much about history, biology and so on, but I do know that one and one is two. I am not an economist, but I do understand some basic things about morality, and I think that I am able to distinguish the wood from the trees. This page is about the wood, but most of the information you can find on this topic is about the trees. Of course it is important to understand the detail, but unless we focus on the main problems, everyone will be confused and the problem will never be solved.

I would be happy if some economists read this and sent me their objections and suggestions. I would then revise the text accordingly. But I would be wary of getting off the track, of changing the subject. My claim is that the simple direct arguments I am presenting here are largely independent of what we normally call economic theory. I am a fan of Ockham's principle of parsimony: simpler arguments are generally more powerful, other things being equal. This idea is a great way to distinguish more important or solid truths from less important or solid ones - to cut through the bullshit (truth distortions, deliberate or otherwise) and find the bottom line.

Some readers will agree with my approach but find it unrealistic. They think the proposed changes will never happen because the resistance is too strong. To those people let me say this. You may be right, and you may be wrong. Many revolutions of the past succeeded in spite of enormous resistance: the French revolution, the abolition of slavery, voting rights for women, voting rights for indigenous peoples, the creation of the United Nations, the end of the Cold War, and most recently the gradual emergence of countries like India, China, Brazil and Russia from poverty. In all these cases, change happened because of the sheer numbers of people who wanted it. Today, the Occupy Movement "We are the 99%" is evidence that a critical mass of people want fundamental changes to the global financial system. It is hard to predict what will happen, but there is nothing to be lost by making clear what we want and supporting each other.