Talking to My Daughter About the Economy

Yield curves, default swaps, average aggregate demand? Economics can be a daunting subject. Even covering the basics can be difficult. However, in our increasingly financialized world, understanding the nature of money and the market is more important than ever.

That’s exactly why former Greek Finance Minister Yanis Varoufakis wrote Talking to My Daughter About the Economy – to present the nuances of this notoriously complex field so clearly that even a preteen could grasp the basics.

These blinks capture the key points from this easy and accessible primer on economic theory. You’ll get a robust rundown on the ins and outs of our contemporary financial landscape. You’ll discover where money comes from, how market logic came to dominate our daily lives, and how we can adapt the economy to work for everyone.

In these blinks, you’ll learn

• how moussaka is different than an iPad
• why cigarettes make excellent currency; and
• how automation might crash the economy.

January, 1788. Eleven British ships reach the shores of Australia. These first colonists bring guns, metal tools, domesticated animals, and European diseases. Australia’s original inhabitants, the Aborigines, have none of these things. They can barely resist as the newcomers take over their home.

Why did it happen this way and not the other way around? Why did the Aborigines not conquer London? It’s not that the Aborigines were inherently less developed than the Europeans. No, the key difference was the material conditions each society developed in.

While Aborigines could easily live off hunting and gathering, the British relied on agriculture – which led to a whole chain of subsequent developments. 

The key message here is: Agricultural surpluses set the stage for modern economic inequality.

So, how does agriculture lead to Europe conquering much of the world? Well, 12,000 years ago, when humans began farming, it was the first time people could produce more food than they actually needed to survive. This excess production, called a surplus, allowed for more material security, but it also required new inventions to maintain and manage future surplus production.

For one, it required buildings to store it, writing to keep track of it, and guards to ensure its safety. With these in place, people could even start trading. Rye for wheat, wheat for barley. You could also leave the surplus in place and simply trade tokens that represented it. Or, trade tokens for surplus that did not yet exist. Suddenly, you have money and credit.

However, money only works when everyone believes it does. Therefore, its value had to be reinforced by, well, force. So, these societies developed bureaucracies to keep track of money and armies to ensure their legitimacy. Pretty soon, you have a whole caste of people who don’t produce surplus but have immense power over its distribution. Suddenly, there’s a hierarchy.

So, while the Aborigines were living hand-to-mouth, developing a society rich in poetry, music, and myth, Europeans were accumulating surpluses and developing a society based on money, management, and hierarchy. The material inequality between these societies was not based on inherent differences, like genetics, but was the result of different material conditions.

But, as we know, Europeans didn’t see it this way. They, like all cultures, had a system of beliefs – an ideology – that reinforced these conditions as inevitable and correct. To them, they didn’t just have more, they deserved more. Thus, when the colonists arrived in 1788, they felt Australia was theirs for the taking.  

Easter Sunday. Your family sits around the table eating moussaka and telling jokes. The sun is warm, the food is good, and everyone is laughing. Truly, these are the good things in life. But, are they goods like the goods you would buy from Amazon?

No, not at all. Goods like your grandmother’s moussaka are made to be shared. Their value is rooted in use. The goods you buy off Amazon, like a clock or an iPad, are different. They are commodities – that is, goods sold on a market. Their value is their price, sometimes called exchange value.

So, which type of value is more valuable? Like it or not, in our contemporary world, exchange value reigns supreme. 

The key message here is: Our market society puts exchange value above all else.

We call our society a market society because the logic of exchange has penetrated almost every aspect of life. The house you live in, the land it sits on, even your time and effort – all these things are assigned a price and exchanged on a market. In short, they are commodified.

It wasn’t always this way. While older societies had markets, they weren’t a dominant force. Take the example of pre-industrial Europe in the Middle Ages. Land wasn’t bought and sold, but inherited by lords. Serfs weren’t paid a wage; they just farmed to produce food. The lords confiscated this food in return for protection. This was an exchange, but it wasn’t a market. There were no prices, just duties and privileges that governed who received what.

When global trade kicked off in the 1500s, this system broke down. Merchants amassed wealth by selling durable goods like wool to distant buyers. Lords saw that peasants farming food only created goods to use – none to sell. So, wanting to get in on the action, they kicked the peasants off the land and began using it to produce commodities like wool. 

Suddenly, land had an exchange value. The peasants, no longer able to create their own food, had to wander the land selling the only thing they owned: their time and toil. Now, labor had an exchange value as well.

The advent of industrialization and factory work only intensified this process. Soon, most people were selling their labor on the labor market in order to afford goods on the commodities market. As time went on, society became centered on these market exchanges.

Let’s say you’re a serf, freshly booted off your lord’s land. To survive in this new market society, you’ve got to make money. Now, you could go and sell your labor at the freshy opened coal mines, or you could go into business producing wool. Obviously, the latter is preferable. But, there’s a price.

First, you need to cover the startup costs. You need money to rent some land, buy some sheep, and pay some laborers. Luckily, the local loan shark can help you out – if you pay him back with interest. You take the deal. 

Congratulations, you’re no longer a serf! Now, you’re an entrepreneur. You’re also in debt, and the only way out of debt is to turn a profit.

The key message here is: Debt fuels a market society’s constant hunger for profit.

People have always done each other favors. One neighbor will help another chop down a tree knowing that next week, they can ask for help in return. These acts of mutual aid are based on community solidarity. After all, when someone says, “Thanks, I owe you one,” they don’t mean it literally.

Debt is different because it introduces two new elements to this relationship. The first – a contract – formalizes reciprocity as a legal obligation, often to be paid in explicit amounts of exchange value. The second element is interest. This is added value the debtor owes on top of what they borrow.

In a market society, anyone who isn’t already wealthy must take on debt in order to produce anything. And, because debt comes with interest, breaking even isn’t good enough; the debtor must turn a profit. Of course, profiting means outdoing the competition by producing the most goods, at the lowest price, with the fewest costs. 

So, entrepreneurs, like our wool-producing serf, must pay workers less and less while investing more and more in things like land and tools. This pressure kicks off a fierce cycle of taking on debt, making profits, and cutting costs. The result? Those that can loan money accumulate more and more wealth, while those that have to work are under constant financial stress.

Many faiths, including Christianity and Islam, used to sanction debt-taking and forbid collecting interest. However, as the market society took hold, these prohibitions weakened. This is just another small example of a society’s material conditions driving its ideologies. 

Imagine you take out a million-dollar business loan from a bank. Where does that cash come from? A vault somewhere in the back? No, not really. As a matter of fact, the bank just adds a few zeros to your account balance, and poof! A million dollars is created out of thin air.

This money now exists with the expectation you will pay it back in the future. If you don’t, you’ll suffer major consequences. For the privilege of getting a loan, you pay the bank in fees and interest. The more loans a bank makes, the more money it collects. So, banks make as many loans as possible.

But, what happens if a bank makes bad loans and no one can pay them back? Will the bankers suffer major consequences? Not likely.

The key message here is: In market societies, banks can’t fail – but you can.

In market societies, money needs to keep moving for the economy to work. Banks help this process along by giving loans and becoming liable for those debts. Sometimes, this works very well. More people can conduct more business and make more profits. However, a bit of greed makes this same virtuous cycle spiral in the other direction.

A problem arises when profit-seeking banks start making riskier and riskier loans. When these debtors fail to make their payments, the bank is left liable for more than they can handle. If someone wanted to withdraw their money, the bank wouldn’t have the cash to pay. So, everyone rushes to get their money out before it’s too late. 

When these inevitable market crashes happen, they risk flattening the whole economy. To prevent this, the state must step in and make their own loans to the banks. This is sometimes called a bailout. This is what happened after the US housing market crash in 2008.  

Now, it’s entirely possible for the state to attach conditions to a bailout. They could make banks follow new rules or even jail the negligent bankers who caused the crisis. Unfortunately, because wealthy bankers often back politicians financially, the state has very little incentive to punish their business partners.

In this way, banks get the best of both worlds. When the economy is good, they get to skim loads of money off the top. When the economy is bad, the government has to step in and give them even more money. They win even when you lose.

Wasily, a trained economist, is having difficulty finding a job. Meanwhile, Andreas is having trouble selling his lovely summer home on the island of Patmos. Both men are trying to sell something but are having no luck finding buyers. Could it be that they set their prices too high?

Well, yes and no. If Andreas dropped the price of his beach house to, say, ten dollars, he wouldn’t have any problems finding a buyer. After all, everyone appreciates a cheap island getaway. But what about Wasily? If he lowered the price of his labor to ten dollars, would someone buy it? 

Not necessarily. Unlike a beach house, people will only buy labor when they really need it.

The key message here is: Labor and money are special commodities with special rules. 

Just like a house, labor can be bought and sold. However, unlike a house, labor provides no experiential value. So, while someone may buy a cheap bungalow to rest and relax in, an employer will only buy labor if they can use it to turn a profit. 

So, if you owned a refrigerator factory, you would only pay for extra employees if you thought their labor was necessary to meet a demand for more refrigerators. If no one was buying fridges, it wouldn’t make sense to staff your factory, even if that labor was very cheap. 

The same logic applies to money. No one buys money – that is, borrows money and pays the interest – for fun. Business people will only buy money if they think it will help them turn a profit, by, for example, letting them buy new equipment. Even if the interest rate is very low, there’s no other reason to borrow.

What does this mean for market societies? Essentially, people will only buy labor or money when they are confident there is consumer demand. In the case of a recession, when no one has spare cash, no one will hire or make investments, thus deepening the recession.  

For this reason, it doesn’t make sense to demand that people work for less, even during recessions. If everyone lowered the cost of their labor, what would happen? Workers would have less money to spend, demand would go down, and fewer businesses would buy labor. Overall, it would be bad for the economy.

In this way, the labor and money markets are a bit irrational. They function like self-fulfilling prophecies, where pessimism leads to downturns and optimism leads to upturns. 

Picture this: It’s the early 1800s, and you work in a cotton mill making fabric. One day, you receive bad news – the boss bought a fancy steam-powered loom. This new machine can produce fabric faster than even dozens of human workers. You’re fired. Now what?

Well, you might gather some friends and smash that new loom into smithereens. That’s what the Luddites did in the nineteenth century. This group of angry mill workers in England led one of the first major movements against automation by destroying the machines that were replacing their labor.

Today, many see Luddites as backwards people impeding progress. However, their efforts to slow automation may also have postponed future market crashes. 

The key message here is: In market societies, more automation isn’t always the answer. 

To understand the problem with automation, you have to examine the way it affects profits. At first, automation cuts the cost of production. After all, if you own a fabric factory, it’s cheaper to buy one efficient loom than to employ hundreds of manual laborers. And, of course, lower labor costs means more profit. Right? 

Not for long. Other factories will also buy a loom to lower their labor costs. Now, to stay competitive, you have to drop the price of your fabric until you can buy an even newer, more efficient loom. And so it goes, back and forth, with everyone buying machines, firing staff, and lowering prices. 

The eventual outcome of this race to automate is a world where fabric is so cheap that factories need to sell loads of it to cover the cost of production. Yet, since all the production is managed by machines, no worker has any wages to buy fabric. In their quest for ever-increasing profits, the fabric producers have created a market crash.

This parable makes it seem that full automation will inevitably lead to economic disaster. But, that isn’t necessarily true. In this scenario, the fabric factories are owned by a very lucky few. These business owners collect all the profit, while the laid-off workers get none. Eventually, all the money is concentrated in one place, and the economy ceases to function.

An alternative arrangement is possible. Imagine if everyone owned a share of the factories. This way, as machines replaced labor, people would still get a cut of the profit, even though they no longer had to work as much. In this scenario, money keeps circulating, people keep buying, and the market does not crash.

Gold, shells, paper notes. All sorts of items have been used as currency throughout history. In the POW camps of World War II, the common currency was cigarettes, which were donated monthly by the Red Cross. Cigarettes were ideal stand-ins for cash because they are small, easy to store, and, in a camp full of soldiers, desired by nearly everyone.

In the camps, the value of cigarettes fluctuated with the supply. When the Red Cross sent a lot, a single smoke could buy one chocolate. When tobacco was in short supply, that same cigarette could fetch ten chocolates.

Outside the camps, the value money has works the same way – except for one key difference. While the Red Cross was an impartial provider of cigarettes, in the real world, control over currency is not so neutral. 

The key message here is: The value of money is always political, so best make it democratic!

As we have already seen, money works as a means of exchange because everyone agrees on its value. This legitimacy is usually legally enforced by the state. It’s no coincidence that coins often bear the image of political rulers. Even the Roman Empire stamped their currency with the faces of emperors. 

But, the value of money is also regulated by the amount of money in circulation. If there is too much currency floating around relative to the goods and services available, that money will be worth relatively less. This is called inflation. The opposite is true, too. When there’s not enough currency, it’s value is too high. This is called deflation.

So, controlling the money supply is an immense power. In most countries, that power belongs to a central bank. These institutions are nominally independent, yet, they often have close relationships with other big banks and members of the wealthiest class. Therefore, when they use their power to control currency, it often serves those interests first. 

For example, if a bank needs a bailout, the necessary currency will be made available with few strings attached. However, if the lower classes want large sums of cash to pay for public goods like infrastructure, that flow of money may be a little less forthcoming.

Like many economic structures, this arrangement is not inevitable. With enough political will, the money supply can be put under more democratic control.

Picture a thriving pine forest on the slopes of the Peloponnese mountains. Now, ask yourself: What makes this forest valuable? Is it the shade it provides, its fresh scent of sap in the air, and the birds chirping in its trees? Or, is it the wood you could chop down and sell as lumber?

Unfortunately, in our market society, the price of that lumber – the forest’s exchange value – is all that matters. In fact, almost all of the natural world is simply treated as a reserve of potential commodities for the market.

Worse still, some of these commodities, such as coal and oil, actively degrade what remains of the non-commodified natural world.

Here’s the key message: Our market society’s obsession with exchange value threatens the entire planet.

Clearly, the pursuit of profit above all else has its problems. Due to the nature of market competition, every individual, or individual business, is incentivized to extract, commodify, and sell as much as possible – regardless of whether it’s sustainable or not. This problem can be observed everywhere from the overfishing of our oceans to the continued sale and use of fossil fuels.

Can this ongoing demolition of the environment be stopped? Maybe. One approach is to pass laws that protect the natural world regardless of its exchange value. Recently, Ecuador has done this by amending its constitution to recognize the inherent value of preserving its rainforests. But with other governments beholden to business interests, strict enough laws may be uncommon.

Another approach is to assign an exchange value to everything, even the air. This is the idea behind a carbon tax, where companies must pay for the right to pollute the atmosphere. In theory, this should incentivize businesses to produce fewer greenhouse gases. However, the price, limits, and enforcement is still up to the business-friendly governments. It also only further entrenches the logic of the market.

A better solution may be to democratically manage the world’s resources. Currently, a handful of rich individuals can decide which resources to extract and sell. If they want to keep drilling for oil, they will – even if millions of people in coastal regions would prefer they invest in solar energy. If those millions of people had a chance to have their voices heard – not as individual consumers, but as a collective community – a more sustainable and equitable path could emerge.  

The key message in these blinks:

The contemporary global economy can be described as a market society, where an increasingly large portion of life is subject to market forces. This means everything from our natural resources to our very time and effort has been commodified and valued based on its ability to generate profit. However, this economic system is not natural or inevitable. If we change how things are owned and what is valued, it is possible to arrange the economy to be more democratic and fair.

What to read next: Adults in the Room, by Yanis Varoufakis

You just heard a clear and easy explanation of the basic tenets of our market economy. Next, learn what happens when this system hits some serious turbulence with Adults in the Room, also by Yanis Varoufakis.

This book-in-blinks gives an insider’s account of Varoufakis’s short and rocky tenure as Greece’s finance minister. You’ll get the full story of how Varoufakis rode a swell of popular support to fight the EU’s strict austerity measures and how the powers that be did everything they could to shut him down.