Dire economic outlooks typically lead to emotional reactions and social fragmentation. This always results in bad decisions and conflicts. Then frustrations increase further as the established ways of doing things come under greater attacks. Irritation over the perceived ineffectiveness of governance systems then creates the wish for a saviour, a strong person, to come and clear up the mess. This is how we create dictators, this is how they come into power. This is how Hitler was elected.
The same dynamic is still inbuilt in our political and social systems and should be taken into consideration when we try to figure out what may happen next. Rather than trying to resolve situations through discourse, populist politicians are increasing tensions through an “us versus them” rhetoric in pursuit of support among their own.
We face a repeating social pattern: with growing economic difficulties, the populist stance is to blame “others”, normally “foreigners”, for taking our jobs or for taking our money.
Aristotle had interesting ideas to explain what was going on in the economy. Aristotle made a distinction between two kinds of value added – one that we get from nature’s resources to sustain our lives, and another, which we create to facilitate our relationships and trade. The value added in the latter does not begin from nature, but from the promises we make to one another – from money.
There are limits to what we can get from nature, but, according to Aristotle, since money is promises, there is no end to the amount of money we can aspire to collect. What is special about money, Aristotle says, is that its value is set by mutual agreement. It has no intrinsic use value, only an exchange value, and it keeps that value only as long as people agree to accept it in payment. As long as there is trust.
Therefore it is understandable if the expanding social dynamic reaches a point where promises are not believed any more. After that limit is passed, the result is a sudden and deep crisis. The whole house of cards crashes because it is made of promises that don’t have any value any more. Fear replaces trust. At the moment, it does not take much distrust to cause solvency problems to highly leveraged banks – or highly leveraged countries.
What is a fairly new phenomenon is that buying and selling are no longer confined to resources, to trading goods and services. The world economy mostly consists of buying and selling money, buying and selling promises according to Aristotle. This is why we are so deeply interdependent and why we are even more dependent on building and sustaining trust.
The only way to sustain democracy is to work together and share the burdens and the efforts – whatever happens.
Thank you Ray Dalio and Mikael Jungner