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According to Varoufakis "talking to my daughter about the economy"

what are his main arguments about profit, public debt and banking in market societies ?
 
 
 
 
Reference: 'Hell is where I am.' This is the demon Mephistopheles' answer when he
appears suddenly before Doctor Faustus, the protagonist of Christopher
Marlowe's famed play, and Faustus asks if he has been suddenly transported to
hell. 'Wherever I go, I'm still in it,' Mephistopheles explains.
I know that you haven't yet read this dark tale of how Faustus sold his soul to
Mephistopheles. The reason I have not introduced you to it before is not because
of its macabre and disturbing narrative. After all, the fairy tales of the Brothers
Grimm, which you have read, are much worse when it comes to gore and
unpleasantness. No, the reason is that it is all about a concept that is truly
inappropriate for children: debt.
Here's what happens in Marlowe's tale: Mephistopheles approaches Doctor
Faustus with a tempting proposal. He'll offer him twenty-four years of absolute
power and limitless pleasure on the condition that Faustus promises to surrender
his soul to him afterwards. Faustus thinks about it and decides that twenty-four
years of omnipotence and bliss are enough, and that Mephistopheles can do as he
pleases with his soul when the time is up. So he agrees. Mephistopheles smiles
and asks him to sign a contract, which Faustus signs not in ink but in his own
blood.
People have always created debts. When one neighbour helps another out in a
moment of need, the latter expresses his thanks, saying, 'I owe you one.'
Without having to sign a contract, both of them recognize that in due course the
good deed will be reciprocated, settling their moral debt. But this kind of
solidarity is different from debt as we understand it today in two ways: first,
because of the contract, and second, because of something called interest.
A contract turns an informal agreement such as 'Lend me a hand today, and
I'll lend you a hand tomorrow' into a legal obligation with specific terms that
take the form of exchange values, often but not always expressed in money.
Within that contract, known as a loan agreement, it is most often the case that
whoever receives the loan (the debtor) will eventually pay the person giving the
loan (the creditor) something extra in addition to repayment of the loan itself,
34
usually more money. This particular form of profit derived from the giving of
loans is called interest. So, here is the difference: in the context of solidarity, the
incentive to help someone is the experiential value that you receive from doing
the right thing, the warm inner glow you feel when you offer to help, just like
when you helped Captain Kostas with his stuck anchor. But in the case of a loan
agreement, of a legal contract, your incentive is to earn some surplus exchange
value in return: to profit from the payment of interest.
In Doctor Faustus' case, Mephistopheles was not interested in solidaristic
exchanges. Sick and tired of dragging people who deserved damnation to hell
against their will, the demon wanted to snare a far greater prize: a good person
who freely chooses their eternal torment. He does so by indebting the good
doctor in a free and fair agreement. As the clock marches second by second to
midnight at the end of Faustus' twenty-four years of bliss, the doctor naturally
sinks deeper and deeper into despair and regret at the contract he had signed,
realizing the terrible 'interest' he must pay.
The story of Faustus and his debt to Mephistopheles is important because it
reflected people's worries at a time when their societies were transforming from
societies with markets into market societies. It is no coincidence that Marlowe
wrote his play in the sixteenth century, back when exchange values first began,
little by little, to prevail over experiential values. In a story that illustrates the
relationship between free choice, a binding contract, debt and interest, the play
reflects beautifully the emergence of the profit motive in early modern Europe
and the anxiety it caused.
That's why I'm telling you that the story of Faustus and Mephistopheles is no
fairy tale; it marks a painful moment in human history, the moment when debt
and profit partnered up.
Let's see how this happened.
The Great Reversal
In the age of feudalism the production of a surplus - which, as we saw in
Chapter 1, is a prerequisite for the existence of an economy of any sort - went
specifically as follows:
PRODUCTION → DISTRIBUTION → DEBT-CREDIT
To explain: first serfs worked the land and produced goods (PRODUCTION).
Then the feudal lord sent his sheriff to extract his share, forcibly, if necessary
(DISTRIBUTION). Finally, after he'd enjoyed what he'd taken, the lord sold any
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goods that were left over for money, which allowed him to buy things, pay for
services and issue loans (DEBT-CREDIT). But as soon as land and labour were
commodified, the Great Reversal occurred: instead of the distribution of surplus
coming after production, distribution began before production had even started.
How was this possible?
Recall that in England the serfs had been kicked off the land and replaced by
sheep. Former serfs then rented land from landowners and supervised the
production of wool and crops that could be sold for profit, so that they could pay
rent to the landowner and wages to the few labourers they hired. In other words,
those former serfs organized the production process like small-scale
entrepreneurs, renting plots from landowners and hiring the manual labour of
other landless serfs.
But to set this process in motion, these new small-scale entrepreneurs needed
some money to begin with - to pay wages, get seeds and of course pay their rent
to the lord - before they had produced any goods. As the former peasant turned
entrepreneur never had enough money to pay for all this before his wool crop
was sold, he had to borrow. Who lent him the money? Very often it was the lord
himself, or local loan sharks, who then charged him interest. At any rate, debt
came first.
And since the amount of money paid to waged workers as wages, the amount
of rent paid to the lord, the sums to be paid for raw materials and tools were all
determined and agreed even before production had begun, the distribution of the
entrepreneur's future revenues was largely decided in advance of their existence
- in fact, the only person who did not know how much he would end up with,
after everyone else got paid, was the entrepreneur himself. In brief, distribution
now preceded production.
This is how the Great Reversal took place, turning debt into the primary factor
and the essential lubricant of the production process. This is also how profit
became an end in itself - for without it the new entrepreneurial class could not
survive. Think about it. If the price of wool suddenly plummeted or some natural
disaster reduced output, they would not only starve but end up with unpayable
debts. As the expiry of their loan agreement approached, they would sink deeper
and deeper into despair. Unable to repay the loans and interest they owed, they
would end up slaves to their debt obligations. Just like Doctor Faustus!
Wealth and competition
In the feudal system, as we have seen, serfs produced without supervision,
simply keeping whatever remained after the landowner took his share. Wages
36
had not been invented, profit-seeking was not a matter of survival, and debt was
not a substantial issue for the majority. Consequently, wealth simply
accumulated in landowners' grand houses and castles. Those in power amassed
further wealth not through investment, commerce and profits but by looting
other feudal lords or peoples, by conceiving plots that would bring them closer
to the king's inner circle, by fighting foreign wars and so on. This was how they
secured the power and glory they dreamed of. Profit didn't even exist as a
concept in their minds.
However, with the arrival of business enterprises intent on making profits, a
new source of wealth was created. Imagine water flowing from a tap into your
bathtub. This is the money coming in to your business. Now imagine the bath
plug has not been put in properly. The water flowing out is what you are
spending to keep the business going. As long as the volume of water from the
tap is greater than the volume of water draining out the plughole, the level of
water in the tub will rise. The greater this difference between the water flowing
in and the water flowing out, the greater the profit; the higher the water level
rises in the tub, the more wealth is accumulated.
In the feudal system the dominant position of the aristocratic class was
assured by their political, military, legal and customary advantages. Rarely was
there any incentive to improve their technologies so as to increase productivity
and increase the rate of wealth accumulation. In contrast, nothing and no one
could or wanted to guarantee the emergent entrepreneurs their survival. Indeed,
the prevailing political, legal and customary system was geared against them.
This is why the only way they could ensure their survival was to profit. And
because, unlike an aristocrat, anyone could become an entrepreneur - assuming
they were willing and able to take on the necessary debt - every entrepreneur
was immediately set against every other in a mortal competition for resources,
clients and survival.
Whoever could sell at the lowest price would attract the most clients.
Whoever paid their hired workers the least would stand to gain the most. And
whoever could increase the productivity of their labour fastest would win both
races at the same time. New technology could confer competitive advantage, and
entrepreneurs had every incentive to take it up. This is more or less how
inventions like James Watt's steam engine, which transformed workshops into
factories, first came to be used.
Of course, the technology came at a price. To buy it, very often more money
had to be borrowed. With additional debt came greater potential for profit but
also a faster route to ruin should things go wrong. As the entrepreneurs' debts,
profits and angst grew and grew, the competition between them became fiercer
37
and fiercer. They had to pay their workers as little as possible, lest they end up
bankrupt. Incredible new wealth thus grew side by side with burgeoning debt
and deepening poverty. While the rich got richer, the bankrupt were ushered into
the hell of the workhouse, and masses of workers faced ever harsher working
conditions.
Do you see now how debt, not coal, was the real fuel that powered the engine
of the Industrial Revolution, generating mountains of wealth for a few and
unspeakable misery for the rest? In market societies all wealth is nourished by
debt and all of the unimaginable riches created over the past three centuries
ultimately owe their existence to debt.
Debt, as Doctor Faustus shows us, is to market societies what hell is to
Christianity: unpleasant yet indispensable.
Doctor Faustus vs Ebenezer Scrooge
Returning to Faustus, you should know that the version of the story which most
people read these days - and the one most performed in theatres - isn't
Marlowe's play The Tragical History of Doctor Faustus but Faust, a much later
version written by the German poet Goethe. While Marlowe wrote his play at the
very end of the sixteenth century, Goethe wrote Faust at the dawn of the
nineteenth. The basic difference in the two versions of the story is fascinating -
at least from the perspective of the economy.
One difference is that in Marlowe's version Doctor Faustus conjures up
Mephistopheles because he feels unconvinced by God and the scriptures. His is a
religious, a philosophical rebellion. In contrast, Goethe's Faust is motivated by
something baser: a crass desire for personal power for its own sake. The second
and more important difference concerns the ending. In Marlowe's version, as I
told you, once his twenty-four years are up, Doctor Faustus begs, cries and
pleads to be released from his contract with Mephistopheles, but to no avail. At
the stroke of midnight repulsive apparitions appear, who amid thunder and
lightning carry him off to hell. Goethe, on the other hand, spares Faust this fate.
Instead of sending his hero to hell, Goethe allows him to achieve redemption
through good deeds and wholesome intentions. Realizing his mistake before his
time is up, Faust performs acts of public service and so, when Mephistopheles
arrives to claim his interest, God's angels intervene. Singing, 'He who strives on
and lives to strive / Can earn redemption still,' they take Faust to heaven instead.
Allow me to suggest one explanation of these differences. Do you know what
today's money brokers - financiers and bankers and the like - call the repayment
of a debt, including interest? They call it redemption as well. Is this a
38
coincidence? Not in the slightest. The question of debt has been a religious one
for a long time. Perhaps you've heard that Islam prohibits the collection of
interest to this day, at least formally. Exactly the same held true for Christianity
when Marlowe was penning his play. Like some Muslims today, Christians back
then considered collecting interest on debt a sin, which they called usury. This is
why the audience watching Marlowe's play, convinced that redemptions of
interest-bearing loans were sinful, absolutely demanded that Doctor Faustus be
punished, since he hadn't hesitated to offer Mephistopheles the ultimate form of
interest: the surrendering of his soul. But by the time Goethe was writing, things
had changed.
And they had changed because, as we have seen, the transition from societies
with markets to market societies that had taken place between Marlowe's era and
Goethe's relied largely on debt and interest. The Industrial Revolution would
simply not have happened without the suspension of the dogmatic rejection, and
legal prohibition, of charging interest on debt. The stigma attached to the
charging of interest was simply incompatible with the commodification of land
and labour and with the Great Reversal. It had to be overturned - and so it was.
The Protestants, who broke away from the Catholic Church in the sixteenth
century, played a crucial role in this reversal. Protestantism emerged in
opposition to the Pope and the cardinals' monopoly of God. Protestants insisted
that anyone could speak personally with the divinity, unmediated by an
authoritarian, stifling Church. Suddenly, the person, the individual who is the
director of his own affairs, became the pillar of that reformed Church. And who
was the ideal example of this newly empowered, autonomous person? In an era
when exchange value and the profit motive were triumphing, Protestantism's
iconic hero was none other than the merchant, the entrepreneur. Unsurprisingly,
the new Protestant ethic embraced interest-bearing loans and profiteering as part
of God's plan.
The fact that Protestants and Catholics engaged in over a hundred years of war
demonstrates what a violent societal shift this was. Thus, by the time Goethe's
audiences were being edified by performances of his Faust, Europeans were far
more forgiving to the indebted, as long as they paid up the original sum plus the
interest due.
In a sense, Goethe's story of Faust was the inverse of Charles Dickens's story
of Ebenezer Scrooge in A Christmas Carol. In Dickens's famous morality tale
the penny-pinching Scrooge accumulates and saves wealth for his entire life,
collecting mountains of interest but spending only the bare minimum. At the end
of the story, when the Ghost of Christmas Yet to Come shows him his own
death, how no one mourns for him and how a poor couple indebted to him
39
rejoice at his demise, he sees the light, opens his coffers and begins to spend,
spend, spend, enjoying his life for the first time by spreading happiness to
everyone around him. If you think about it, Faust does the exact opposite. Rather
than accumulating interest and rejecting the pleasures of life, he enjoys life to its
full for twenty-four years, agreeing to pay a sizeable amount of interest in return.
Which of the two, Scrooge or Faust, do you think was more in step with the
needs of the new market society that had come about by the time Goethe was
writing? Faust, of course. Why? Because if we were all Scrooges - misers who
saved all our wealth without borrowing or spending - then the economy of
market societies would come to a complete standstill.
It is to this phenomenon that we shall now turn.

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