Key Points: Has China Won? The Chinese Challenge To American Primacy

The intensifying rivalry between U.S. and China since Donald Trump presidency has brought into the headline many ideological conflicts between Western and Chinese version of capitalism and ideal society. In this book, Kishore Mahbubani laid out thinking process of leaders in the West and in China, each justifying their past actions and future plan, which is useful for investors in thinking the most likely economic and political development of both society.

The big lesson I learned from Singapore’s three exceptional geopolitical masters (Lee Kuan Yew, Goh Keng Swee, and S. Rajaratnam) was that the first step to formulate any long-term strategy is to frame the right questions. If one gets the questions wrong, the answers will be wrong. Most importantly, as Rajaratnam taught me, in formulating such questions, one must always “think the unthinkable.”

Professor Wang Gungwu has observed that while the world has had many ancient civilizations, the only ancient civilization to fall down four times and rise again is China. As a civilization, China is remarkably resilient. The Chinese people are also remarkably talented. As the Chinese look back over two thousand years, they are acutely aware that the past thirty years under CCP rule have been the best thirty years that Chinese civilization has experienced since China was united by Qin Shi Huang in 221 BCE. For most of the past two thousand years, the large pool of brainpower available in the Chinese population was not developed under the imperial Chinese system. During the past thirty years, for the first time in Chinese history, it has been tapped on a massive scale. Cultural confidence, which the Chinese have had for centuries, combined with what China has learned from the West have given Chinese civilization a special vigor today.

Chinese culture values social harmony over individual empowerment. American culture is the opposite. This sense of individual empowerment has enabled American society to produce some of the most powerful individuals on planet earth. In many societies, the tall nail that stands out is hammered down. A Chinese saying is: “A tall tree catches the wind” (shù dà zhāo fēng, )—a person in a high position is liable to be attacked. In America, the tall tree is worshipped. Hence, the most admired and respected Americans are successful individuals like Bill Gates of Microsoft, Steve Jobs of Apple, Jeff Bezos of Amazon. Even Mark Zuckerberg and Elon Musk remain admired figures, even though their companies, Facebook and Tesla, are facing a lot of criticism. No society has as powerful an ecosystem as America for producing strong individuals. Our society cannot replicate this great strength of America. China stood up again after a hundred years because of a towering figure like Mao Zedong. American society produces many Mao Zedongs.

Throughout the long history of humanity, the most successful societies have always been those that fostered diverse schools of thought. In China’s most creative period, many schools of thought emerged simultaneously: Confucian, Taoist, Legalist. Today, America leads the world in fostering diverse views. The American universities have created the most powerful intellectual ecosystems in the world. This culture of challenging and criticizing conventional wisdom in turn generates creativity and innovation. Hence, in field after field, America produces more Nobel Prize winners than any other country.

One big mistake that the central party leadership made in the 2000s was to not check carefully how the provinces and cities were treating foreign investors. Yet, even if Beijing wished to do so, there are limits to how much day-to-day control the center can impose. A well-known Chinese saying is: “The mountains are high, and the emperor is far away” (shān gāo, huáng di yuǎn, ). For millennia, the provinces of China, even under strong emperors, have always had strong local autonomy. Often, even when a problem encountered at the provincial level was raised in Beijing, little could be done.

many Chinese officials are familiar with Marxist literature and its derivatives. Such literature contains many derisive views of businessmen. For example, Lenin once famously remarked that businessmen would happily sell for a profit the rope that would later be used to hang them. As an aside, let me mention that I have actually seen this happen in real life. When I served in Phnom Penh in 1973 to 1974, the government in charge was a pro-American government supported by the American military. The American military would, at great expense, fly in artillery shells to defend the capital city, Phnom Penh. The corrupt generals in the pro-American government would then immediately sell these artillery shells to middlemen who would then sell them to the Khmer Rouge, even though these artillery shells would then be fired into the city and endanger the lives of the families of these pro-American generals. In short, it is true that many businessmen can be opportunistic and corrupt.* Yet, if the Chinese government had held such a one-dimensional Leninist view of business communities, it would have been a major mistake. Businessmen and businesswomen, if they are made to sign agreements under duress, even agreements that are profitable to them, will carry in their hearts deep resentment toward Chinese officials who make them sign such agreements. This may well be true even if all the procedures are perfectly legal. Yukon Huang, a former World Bank economist who served in China for many years, has pointed out that under WTO rules, it is perfectly legitimate for a developing country like China to ask for technology transfer as a condition for investing in China.

Why did the Chinese economy, which was on par with the rest of the world from the year 1 to 1820, fall so far behind? Why couldn’t the brilliant minds in the Chinese emperor’s court discern that the world had changed dramatically? The common cause of the massive blindness of the Chinese officials in the nineteenth century was a huge Chinese philosophical assumption that China was a great self-sufficient Middle Kingdom that did not need to engage the world. As the Chinese emperor Qianlong famously told Lord Macartney, China had everything it needed. It didn’t need the rest of the world.

America would present a formidable challenge to China if it were a united, strong, and self-confident country. Kennan emphasized this dimension in his Mr. X essay, when he argued that American power depended on its ability to “create among the peoples of the world generally the impression of a country which knows what it wants, which is coping successfully with the problems of its internal life and with the responsibilities of a world power, and what has a spiritual vitality capable of holding its own among the major ideological currents of the time.”

In recent decades, this trust has begun to erode because America has occasionally used the privilege of having the global reserve currency as a weapon against other countries. Here are two examples of how the US dollar has been weaponized; both involve American efforts to isolate Iran. In 2012, a British bank, Standard Chartered, was fined $340 million because it had used the US dollar to finance a trade transaction with Iran. This fine clearly represented an extraterritorial application of American domestic laws. As a British bank, Standard Chartered had broken no British laws. Neither had it violated any sanctions imposed by the UN Security Council. Yet, the dominance of the US dollar in international financial transactions enabled America to punish a British firm for breaking American laws—a clear weaponization of the US dollar.*

The US dollar could continue to reign supreme over the coming decades. However, it doesn’t take a strategic genius to figure out that it is not in America’s long-term interest to jeopardize one of its largest global strategic assets (the US dollar) by using it to extract small gains from one relatively small country, Iran. The strategic competition with China is going to be a long-term game, not a short-term one. By creating a dent in global trust in the US dollar, America is putting a pebble in its own running shoe, just as the race with China is about to become more competitive. This is what happens when America fails to develop a comprehensive global strategy to deal with the return of China. As Fareed Zakaria observes, “INSTEX is a warning sign, the canary in the coal mine. The United States’ closest allies are working hard to chip away at a crucial underpinning of U.S. global power.”

Americans fundamentally believe that they should stand for universal values and sincerely believe that the world would be a better place if the rest of humanity absorbed and implemented American values. Hillary Clinton said in a 2016 speech: When we say America is exceptional, it […] means that we recognize America’s unique and unparalleled ability to be a force for peace and progress, a champion for freedom and opportunity. Our power comes with a responsibility to lead, humbly, thoughtfully, and with a fierce commitment to our values. Because, when America fails to lead, we leave a vacuum that either causes chaos or other countries or networks rush in to fill the void.* The Chinese believe the opposite. They believe that only Chinese can be Chinese in culture, values, and aesthetics. I have long lived in a Chinese-majority society of Singapore. None of my Chinese friends would have expected me to become like them, even if I were fluent in the language and adopted Chinese customs habitually.

The Chinese are even more puzzled that America has allowed its involvement in unnecessary Middle East conflicts to undermine its more fundamental national interests. Such involvements have drained resources and taken away the possibility of using the same resources to improve the lives of relatively poor Americans instead. The Chinese are privately delighted because each unnecessary involvement in a Middle Eastern conflict reduces American ability to deploy resources against China. Having seen the folly of wasteful American military involvements, the Chinese have learned one wise lesson: refrain from getting involved in unnecessary fights. It is not an accident that China has not fought a major war in forty years and has not fired a bullet across its borders in thirty years. This lack of military action reflects both a powerful civilizational impulse and a deeply pragmatic view of power.

Having been burnt in Iraq and Afghanistan, the logical response of America, if it were supple, flexible, and rational, would be to walk away from getting involved in unnecessary conflicts in the Islamic world. The inability to make this U-turn demonstrates that, like the old Soviet Union, America has become rigid, inflexible, and doctrinaire. Quite amazingly, the major strategic minds inside the administration and outside continue to support American military intervention in various Islamic countries, including Libya, Syria, Yemen, Somalia, and so on.

One scholar who has tried to provide some intellectual justification for America’s involvement in military conflicts is Robert Kagan. He argues that the world would descend into chaos if America withdrew. His book title, The Jungle Grows Back, says it all. If America withdraws from the world, the world can only regress back toward becoming a jungle, dominated by primitive savagery and chaos. This is what Kagan says: What we liberals call progress has been made possible by the protection afforded liberalism within the geographical and geopolitical space created by American power. […] The question is not what will bring down the liberal order but what can possibly hold it up? If the liberal order is like a garden, artificial and forever threatened by the forces of nature, preserving it requires a persistent, unending struggle against the vines and weeds that are constantly working to undermine it from within and overwhelm it from without.

In Chinese political culture, the biggest fear is of chaos. The Chinese have a word for it: luàn (). Given these many long periods of suffering from chaos—including one as recent as the century of humiliation from the Opium War of 1842 to the creation of the People’s Republic of China in 1949—when the Chinese people are given a choice between strong central control and the chaos of political competition, they have a reflexive tendency to choose strong central control. This long history and political culture may well explain Xi Jinping’s decision to remove term limits. The conventional Western view is that he did so to reap personal rewards by becoming dictator for life. Yet, his decision may have been motivated by the view that China faced a real danger of slipping back into chaos. Two major challenges emerged that could have undermined the strong central control of the CCP. The first was the emergence of factions in the CCP led by Bo Xilai and Zhou Yongkang, two powerful members of the CCP. The second was the explosion of corruption.

It can be argued that strong central control of China by the Chinese Communist Party under Xi Jinping is producing at least three “global public goods” that the world is indeed benefiting from. And if Max Weber were alive today, he would be astonished to see the absence of strong Western voices observing and documenting how the West (and the rest of the world) is benefiting from the stable and rational rule of China by the CCP. The first global public good that the CCP is delivering is to rein in a strong nationalist dragon that is clearly alive and well within the Chinese body politic. There are many reasons for nationalism in China. Most Chinese are aware that China was badly trampled upon and humiliated during the century of humiliation after the Opium War. China’s recovery today has buoyed their national pride. Many in the West were shocked when in 2001 the Taliban destroyed the precious antique Buddhist statues in Bamiyan, which had survived fourteen centuries. Yet, those shocked Westerners, outraged by the Taliban’s behavior in 2001, failed to remember or mention that barely a hundred and fifty years earlier British and French troops had behaved just like the Taliban in Beijing in 1860.

Since the Chinese Communist Party is constantly vilified in the Western media, very few people in the West are aware that the members of this Communist Party have delivered the best governance China has ever enjoyed in its entire history.

There is political oppression in China. Any government that is based on an authoritarian model has no choice but to suppress political dissent. Chinese emperors had to do so for millennia. Yet, if repression were the sole goal and instrument of Chinese government rule, it would not and could not last. A wise Chinese government in the twenty-first century knows that it has to balance three partially contradictory goals to ensure a healthy Chinese society. The three goals are growth, stability, and personal freedom.

Western political theory teaches us that the development of a large middle class leads to demands for greater political participation. If a government ignores their demands, there could be a revolution on the streets, and the government would be overthrown. So now that China has the world’s largest middle class, why has it not revolted against the authoritarian nondemocratic rule of the CCP? The conventional Western answer is that repression has prevented this from happening. Certainly, repression is a factor. Many revolts are nipped in the bud. Yet, every Chinese government has known for millennia that if the vast majority of the Chinese people choose to revolt, no amount of repression can hold them down. This is why in traditional Chinese political theory, when a broad-based revolt breaks out, the Chinese emperor is deemed to have lost “the mandate of heaven.”

So repression is not the sole reason why the Chinese middle classes are basically calm. Most of them accept an implicit social contract between the Chinese people and the Chinese government. As long as the Chinese government continues to deliver economic growth (with improvements in living conditions, including better environmental living conditions) and social and political stability, the Chinese people will accept the rule of the CCP.

John Rawls, the political philosopher, wrote in A Theory of Justice that the most just society is one that one would choose to be born into if one didn’t know whether one would be born among the most or least advantaged in society. A rational choice would be to pick the society where the least advantaged are better off.

The relative comfort of the 1.4 billion people of China with a social and political order that is vastly different from the Western order ought to encourage the West to undertake a deep process of introspection. Is it wise to believe that there is only one road for all societies to travel on if they want to grow and progress? Are we now turning a new corner of human history where alternative models of social and economic development are emerging? It was an Indian political scientist, Pratap Bhanu Mehta, who alerted me to a significant difference between the democratic Indian society and communist Chinese society. He shrewdly observed that India was an open society with a closed mind, whereas China was a closed society with an open mind. The same observation may well apply to American society.

At the same time, in contrast to the bureaucracy of the former Soviet Union, which was rigid and inflexible, the Chinese bureaucracy has become responsive and accountable. This is how Yuen Yuen Ang, a political science professor at the University of Michigan, Ann Arbor, describes the reforms that China has undertaken: Since opening its markets in 1978, China has in fact pursued significant political reforms—just not in the manner that Western observers expected. Instead of instituting multiparty elections, establishing formal protections for individual rights, or allowing free expression, the CCP has made changes below the surface, reforming its vast bureaucracy to realize many of the benefits of democratization—in particular, accountability, competition, and partial limits on power—without giving up single-party control. Although these changes may appear dry and apolitical, in fact, they have created a unique hybrid: autocracy with democratic characteristics. In practice, tweaks to rules and incentives within China’s public administration have quietly transformed an ossified communist bureaucracy into a highly adaptive capitalist machine.

Bert Hofman, the former World Bank Country Director for China, was also quoted as saying: “China has made rapid progress in improving its business climate for domestic small and medium enterprises in the past year. This progress, which now puts China among the top 50 economies in the world, signals the value the government places on nurturing entrepreneurship and private enterprise.”* The World Bank report also observed that “since last year, three procedures were removed and consequently it now takes 9 days to start a business, on par with most OECD high income countries. In addition, Beijing is now one of only two cities in the world where the process of starting a business is completely free.”* An obvious point needs to be emphasized here. No entrepreneurship can happen unless people feel that they have the freedom to take risks and make individual decisions.

So why does America promote the idea of democracy in China? Americans believe that democracies are essentially better than autocracies because they provide freedom to individuals. This freedom in turn enables individuals to thrive and flourish, using all their natural talents to do the fullest. This will result in a society becoming more prosperous and stronger. There is a lot of merit to this belief. Hence, if China does the same, the theory goes that China would emerge as a much more productive society, and its economy would grow even faster. Indeed, if this political experiment works and the average Chinese citizen becomes half as productive as the average American citizen, China would then have an economy that will be twice as large as America’s economy and the potential to become four times as large. But does it really serve US national interests to have a Chinese economy that is twice or four times as large as its own? One key goal of the current American security establishment is to maintain American primacy for as long as possible. So it would then clearly be against America’s national interests to promote democracy in China if democracy was such a growth engine. Since America’s security establishment is full of thoughtful and intelligent people, they might argue that the country should immediately stop exporting democracy to China for fear that it would create an even bigger rival. Yet, the American security establishment continues to promote the export of democracy to China. Why? Because in practice, democracy promotion can have the opposite effect of what the theory suggests. It can destabilize and weaken societies, instead of strengthening them.

Every two to four years Americans go to the polls to elect their congressmen, senators, governors, and state legislative assembly representatives. And yet, under the surface guise of a functioning democracy, with all the rituals of voting, America has become a society run by a moneyed aristocracy that uses its money to make major political and social decisions. As a result, this class has been able to enact the greatest transfer of wealth that has ever taken place in American society.

In the past, the broad middle classes of America had a strong say in determining the fundamental direction of American society. Today, they no longer do. The decisions of the US Congress are not determined by the voters; they are determined by the funders. As a result, America is becoming functionally less and less of a democracy, where all citizens have an equal voice. Instead, it looks more and more like a plutocracy, where a few rich people are disproportionately powerful.

It is a huge irony that Congress passed the Foreign Corrupt Practices Act in 1977, which specifically prohibits the “authorization of the payment of money or anything of value to any person, while knowing that all or a portion of such money or thing of value will be offered, given or promised, directly or indirectly, to a foreign official to influence the foreign official in his or her official capacity, induce the foreign official to do or omit to do an act in violation of his or her lawful duty, or to secure any improper advantage in order to assist in obtaining or retaining business for or with, or directing business to, any person.”* Effectively, this means that if an American corporation uses money to influence an Egyptian or Indonesian legislator, he will be punished under American law. However, if the same American corporation uses money (through campaign and super PAC contributions) to influence American legislators, it is part of the democratic process.

The fact is that the American social contract has come to rest on one ideological pillar, freedom, instead of the traditional two pillars of democracies, freedom and equality. In functional terms, the American political system is moving from being a democracy to becoming a plutocracy, betraying the ideals of its Founding Fathers.

Rawls goes on to emphasize the following point: “All social values—liberty and opportunity, income and wealth, and the social bases of self-respect—are to be distributed equally unless an unequal distribution of any, or all, of these values is to everyone’s advantage.”

The reverse of meritocracy is aristocracy. In a meritocracy, if you are given a decent start in life, your destiny is determined by your performance in life; in an aristocracy, your destiny is determined at birth. Even though the American system has effectively created a new moneyed aristocracy, many Americans cannot see it. Attackers of this system are often labeled “socialists”—implying that they don’t subscribe to the ideals of America’s Founding Fathers, when in fact it is the system itself that has failed those ideals.

cultural affinity cannot overcome geopolitical realities. Many American thinkers don’t understand the importance of geographic realities because America has been blessed with the best geography in the world. Americans are blessed with a large and productive continent, separated from the populous masses in Eurasia and Africa by two vast oceans, and they have only had to worry about the military threats posed by Canada and Mexico. Given such an environment, Americans don’t understand the real meaning of the word geopolitics, a combination of geography and politics, of which geography may be the more important. Europe is cursed with an unlucky geography. In the twenty-first century, Europe will not be threatened by Russian tanks and missiles. The prospect of a direct war with Russia is practically zero, although proxy wars may take place in territories like the former Yugoslavia and Ukraine. However, the prospect of Europe being overwhelmed by millions of migrants coming in from Africa in little boats is very real. There is one demographic statistic that spells out clearly the number one geopolitical threat the European Union will face. In 1950, the EU’s combined population (379 million)* was nearly double that of Africa’s (229 million). Today, Africa’s population (1.2 billion in 2015)* is double that of the EU countries (513 million in 2018).* By 2100, Africa’s population is projected to be almost ten times larger, 4.5 billion* versus 493 million.*

If Europe wants to preserve its own long-term interests, it should make the development of Africa, in partnership with China, an immediate priority. The country that attracts the largest number of African leaders to summit meetings is China. The most sensible thing for European leaders to do is to join, en masse, the next high-level meeting of Chinese and African leaders in Beijing. A massive turnout of European leaders at such a summit would send a powerful market signal. It could catalyze a powerful wave of new investment in Africa. Over time, with a strong African economy, there will be less incentive for widespread African migration to Europe.

Fortunately, it is currently in China’s national interest to see Japan remain an American ally. If America walks away now from its commitment to defend Japan under the Treaty of Mutual Cooperation and Security of 1951 (revised in 1960), which clearly states in Article V that “each Party recognizes that an armed attack against either Party in the territories under the administration of Japan would be dangerous to its own peace and safety and declares that it would act to meet the common danger in accordance with its constitutional provisions and processes,”* Japan would have no choice but to strengthen its capability to defend itself. Japan could be forced to acquire nuclear weapons.

It is almost certain, even as China opens up and integrates itself with the rest of the world, that it will not become a political or social replica of a Western liberal-democratic society. The cultural gap between China and the West is too great for the Chinese to feel comfortable in replicating Western social and political forms. However, the cultural gap between China and Japan is not as wide.

But despite China’s greater sensitivity concerning Taiwan, it could allow pragmatism to trump principles. When China established diplomatic relations with America in January 1979, America dropped its diplomatic recognition of the government in Taipei and switched it to Beijing. Since Jimmy Carter was perceived to have dropped a long-standing ally in Taiwan, the US Congress reacted by passing the Taiwan Relations Act with the intention of defending the government in Taiwan, which China regarded as renegade. Since this was a violation of the spirit, if not of the letter, of the diplomatic agreement signed between America and China, China could have, as a matter of principle, suspended all its economic dealings with America. Instead, China did some careful long-term pragmatic calculations. Having come to realize how backward the Chinese economy had become, the Chinese leaders led by Deng Xiaoping decided to “swallow the bitter pill of humiliation” (a well-known Chinese phrase) and use the massive American economy to boost its own economic growth. Forty years later, we know how wise and shrewd this pragmatic Chinese decision was. The Taiwan Relations Act was passed in 1979. In that year, in PPP terms, the Chinese economy was only about 10 percent that of America’s. By 2014, China’s economy had become larger. This shows the value of being pragmatic over being principled in international relations.

One key message of this book is that while Chinese leaders want to rejuvenate Chinese civilization, they have no missionary impulse to take over the world and make everyone Chinese. China’s role and influence in the world will certainly grow along with the size of its economy. Yet, it will not use its influence to change the ideologies or political practices of other societies. One great paradox about our world today is that even though China has traditionally been a closed society, while America purports to be an open society, the Chinese leaders find it easier than American leaders to deal with a diverse world, as they have no expectation that other societies should become like them. They, unlike Americans, understand that other societies think and behave differently.

Emotions play as important a role as reason in international relations. It would have been easier for America to accept the rise of another power if China had been a fellow Western democratic power, especially a fellow Anglo-Saxon power. This explains why the power transition from the United Kingdom to the United States went relatively smoothly: one Anglo-Saxon power was giving way to another. No dark emotional overtones accompanied this transition. By contrast, China is a very different culture and has always been perceived to be different in the Western imagination. Between America and China, there is a natural and legitimate concern: Will they understand us, our interests and values? Will we understand them? To make matters worse, there has been buried deep in the unconscious of the Western psyche an inchoate but real fear of the “yellow peril.” Since it is buried deep in the unconscious, it seldom surfaces. When senior American policymakers make their decisions on China, they can say with all sincerity that they are driven by rational, not emotional, considerations. Yet, to an external observer, it is manifestly clear that America’s reactions to China’s rise are influenced by deep emotional reactions, too. Just as individual human beings have difficulty unearthing the unconscious motives that drive our behavior, countries and civilizations also have difficulty unearthing their unconscious impulses. It is a fact that the yellow peril has lain buried in Western civilization for centuries. Napoleon famously alluded to it when he said, “Let China sleep; when she awakes she will shake the world.” Why did Napoleon refer to China and not to India, an equally large and populous civilization? Because no hordes of Indians had threatened or ravaged European capitals. By contrast, hordes of Mongols, a “yellow race,” had appeared at Europe’s doorstep in the thirteenth century. As Noreen Giffney recounts: “in 1235, Mongol armies invaded Eastern Europe and the Rus’ principalities between 1236 and 1242. […] The Mongol onslaught was followed by a swift and mysterious withdrawal to the surprise and relief of Westerners.”

the one area where there appears to be a fundamental contradiction between America and China would be in the area of values, especially political values. Americans hold sacrosanct the ideals of freedom of speech, press, assembly, and religion and also believe that every human being is entitled to the same fundamental human rights. The Chinese believe that social needs and social harmony are more important than individual needs and rights and that the prevention of chaos and turbulence is the main goal of governance. In short, America and China clearly believe in two different sets of political values.

The common interest that America and China have in dealing with terrorism and with the troubled parts of the Islamic world reinforces the key message of this book. If America and China were to focus on their core interests of improving the livelihood and well-being of their citizens, they would come to realize that there are no fundamental contradictions in their long-term national interests. In 2010, then prime minister Manmohan Singh and Premier Wen Jiabao captured the positive spirit of Sino-Indian relations in a joint statement: “There is enough space in the world for the development of both India and China and indeed, enough areas for India and China to cooperate.”* Similarly, there is enough space in the world for both America and China to thrive together.

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Mark Carney is without doubt one of the most respected central banker in the 21st century. His career spanned globally from Canada to Britain, and his breadth of knowledge is not limited to economic and financial world. In his book, Value(s), he outlined the how what we value could become values and invite readers to revisit both concepts in relation to the impact of capitalism and social justice. In the last part of the book, he outlined the case for global cooperation in fighting climate change and to reach the goals under Paris Climate Agreement. Below are some key points I highlighted in the book.

The gold lies pointlessly in our vaults, a vestige of a bygone era when it backed the value of money – a link that became a cross, inspiring booms before triggering busts. Financial markets value gold for its perceived safety not for its revealed beauty. The gold price surges with fears of financial distress or geopolitical conflict. In such times of turbulence, faith in a commodity replaces trust in institutions.

Pope Francis surprised us by joining the lunch and sharing a parable. He observed that: Our meal will be accompanied by wine. Now, wine is many things. It has a bouquet, colour and richness of taste that all complement the food. It has alcohol that can enliven the mind. Wine enriches all our senses. At the end of our feast, we will have grappa. Grappa is one thing: alcohol. Grappa is wine distilled. He continued: Humanity is many things – passionate, curious, rational, altruistic, creative, self-interested. But the market is one thing: self-interest. The market is humanity distilled. And then he challenged us: Your job is to turn the grappa back into wine, to turn the market back into humanity. This isn’t theology. This is reality. This is the truth.

Values and value are related but distinct. In the most general terms, values represent the principles or standards of behaviour; they are judgements of what is important in life. Examples include integrity, fairness, kindness, excellence, sustainability, passion and reason. Value is the regard that something is held to deserve – the importance, worth or usefulness of something. Both value and values are judgements. And therein lies the rub.

market fundamentalism contributed directly to the global credit crisis, in the form of light-touch regulation, a belief that bubbles cannot be identified and a misplaced confidence in a new era. Authorities and market participants fell under the spell of the three lies of finance, believing that ‘this time is different’, that ‘markets are always right’ and that ‘markets are moral’.

Markets are essential to progress, to finding solutions to our most pressing problems, but they don’t exist in a vacuum. Markets are social constructs, whose effectiveness is determined partly by the rules of the state and partly by the values of society. If left unattended they will corrode those values.

But with what does economic value theory properly concern itself? After all, value is also a property of literature, art, education and religion. At their core, economic theories of value seek to explain why goods and services are priced as they are and how to calculate their correct price, if such a value is thought to exist.

Much of historical thinking about economic value concentrates on the process of value creation, with different conceptions of value rooted in the socioeconomic and technological conditions of the time. Many value theorists give heavy consideration to distributional consequences, and distinguish between productive and unproductive activities, with the aim of increasing the ‘wealth of the nation’. In these regards, historical approaches to economic value embody values relating to ‘what is important in life’. The various approaches to value also usually differentiate between value creation and value extraction, or rent seeking. Value creation results from combining different types of resources (human, physical and intangible) to produce new goods and services. Value extraction can be thought of as the product of ‘moving around existing resources and outputs and gaining disproportionately from the resulting trade’.5 ‘Rent’ is the return to this activity, and it has been at best viewed as unearned income or, at worst, theft.

In objective theories of value, value is determined by the production of goods and services. Objective approaches contend that, although the price of a product results from supply and demand, its underlying value is derived from how that product is produced and how that production affects wages, profits and rents. In objective theories, value is tied to the nature of production, including the time required, the quality of labour employed and the influence of new technologies and ways of working. Proponents span Aristotle to Adam Smith and Karl Marx. In contrast, subjective theories of value place greater weight on how exchange value (the price of goods and services in the market) reveals underlying value. In subjective theories, value is in the eyes of the beholder, driven by preferences and to a lesser extent scarcity. This approach is most clearly associated with neo-classical economists of the nineteenth century, such as William Jevons and Alfred Marshall, and it is dominant in our time. This has a variety of consequences, especially the implication that something which is not priced is neither valued nor valuable; it is as if the price of everything is becoming the value of everything.

The fifteenth and sixteenth centuries brought new technologies and modes of organisation that gave rise to commercial society. Maritime trade grew with the new navigational instruments; farming began to lose its feudal characteristics; and the economy moved towards large, organised markets, under guilds and the great trading companies (such as the East India Company) that were monopolistically controlled under official protection. In response, a new economic doctrine – mercantilism – was born. At its heart, mercantilism was the view that maximising net exports was the best route to national prosperity, and that a country’s wealth was measured by gold, the by-product of these surpluses.

According to Petty, ‘natural value’ was determined by the factors of production – land and labour – and the market price (‘actual price’) of any commodity would fluctuate around its natural value (‘natural price’). Petty simplified his theory of value to one based on labour, by solving for a ‘par’ value for land in terms of labour.15 That labour value, in turn, was determined by a form of subsistence wage, which was the unit of measure consisting of ‘The easiest-gotten food of the respective countries of the world’.16 In this respect, Petty foreshadows the labour theories of value of Adam Smith, David Ricardo and Karl Marx.

Quesnay’s Tableau supported farmers against the mercantilists, as it showed that all value arose from the land.21 His classification overturned the mercantilist approach which had placed exchange and what was gained from it – gold – at the centre of value creation. Now value was linked inextricably with production, albeit only agricultural production.22 In Quesnay’s tableau, as long as what is produced is greater than what is consumed, the resulting surplus could be reinvested, and the economy would grow. Conversely, if value extraction by unproductive sectors exceeds value creation by agriculture, the economy would decline. This conception of surplus and reinvestment driving the economy forward would be adopted by the classicists.

The focus of the classicists was political economy, with the study of economics integral to their study of society. Their approach centred on the development of markets and placed the growth and distribution of value squarely in the context of the enormous social and technological changes then underway. They worked during an unprecedented period of growth, urbanisation, industrialisation and globalisation. The classicists would have found profoundly alien the view – widespread today – that economics is a neutral technical discipline which can be pursued in isolation from such dynamics.

Smith, in contrast, was concerned with exchange across the entire economic and social spheres. To Smith, all of human life involved exchange, with the consequence that we can no more extricate his theories of markets and value creation from their broader social context than we could separate the views on value of the canonists from their systems of social philosophy and ecclesiastical jurisprudence.

Smith addressed too the question of what happens when markets go wrong. He was well aware of the damage that monopolies could do, and he viewed a free market as one that was free of rent. He included a searing attack on mercantilists – or what we would now refer to as crony capitalists. Like Quesnay, he argued that mercantilist policies restricted competition and trade, and undercut industry, which was the true source of value creation in the economy.

Smith adopted the same systematic approach to economic growth as the physiocrats, he widened the concept of the productive sphere of the economy from agriculture to include industry. In both systems, growth arises because of surpluses that are reinvested in productive activities (in Smith’s case manufacturing) rather than in unproductive consumption of luxuries or rent seeking.

Smith was wary of the dangers of capture of government by business. He consistently warned of the collusive nature of business interests, including fixing the highest price ‘which can be squeezed out of the buyers’. He cautioned that a business-dominated political system would allow a conspiracy of industry against consumers, with the former scheming to influence politics and legislation.32 Consistent with this view, he promoted free trade to break the power of the mercantilists and increase the share of manufacturers in a competitive market.

Smith acknowledges that differences in labour quality mean that simply measuring the hours of work that went into producing an object is not equivalent to the effort. And he highlights the ways in which a good’s ‘real’ value (determined by labour) can be distinct from the money price of the good, which he calls its ‘nominal’ price: ‘Labour alone, therefore, never varying in its own value, is alone the ultimate and real standard by which the value of all commodities can at all times and places be estimated and compared. It is their real price; money is their nominal price.’34 In a barter economy, Smith argues, goods could be more easily traded at ratios that directly reflect the labour required to produce them, as in his famous example: ‘If among a nation of hunters, for example, it usually costs twice the labour to kill a beaver which it does to kill a deer, one beaver should naturally exchange for or be worth two deer.’

Ricardo took Smith’s ideas further. First, he articulated what came to be known as the ‘law of diminishing marginal returns’, one of the most important in economics. It holds that as more and more resources are combined in production with a fixed resource – for example, as more labour and machinery are used on a fixed parcel of land – the incremental increase in output will diminish. Restricting foreign imports would bring more marginal land into production, raising grain prices, increasing rents to landlords, reducing the profits of manufacturers and, as a consequence, lessen their capacity to invest in new production. As we shall see in the next chapter, the analogue on the demand side is diminishing marginal utility, which holds that the more of a good one consumes – such as ice cream on a sunny day – the less the enjoyment derived from each additional scoop.

Ricardo began his most famous work, Principles of Political Economy and Taxation (1817), with his labour theory of value: The value of a commodity, or the quantity of any other commodity for which it will exchange, depends on the relative quantity of labour which is necessary for its production, and not on the greater or less compensation which is paid for that labour.37 He distinguished between the price of a good or service and its underlying value. Like Aristotle and Adam Smith, he held that the relative values between two goods are determined by the relative quantities of labour needed to make them.

At a minimum, workers need to work for long enough to regenerate their labour power: receiving an amount equivalent to a subsistence wage. But their labour power is such that they can work longer and, if they do, surplus value is created. The genius of capitalism is to make this happen, and for capitalists to then pocket the vast majority of the associated surplus value, paying workers only a wage sufficient for workers to buy commodities like food and housing to restore their strength to work.

Marx also saw that the growing general commercialisation and financialisation of the economy could ultimately undermine the growth of production. In his view, commercial and speculative financial firms do not add value to capitalist production. By capturing an increasing share of the surplus, they diminished the profit in the economy available for reinvestment. Finally, the social dimension of capital would feed instability. Capital gives capitalists their power over workers who cannot realise their labour power in isolation from the means of production. Workers become alienated from their work because they do not own the means of production, and the surplus they create is taken away from them. For Marx as for Aristotle and Aquinas, the exchange of value, or more appropriately the exchange of ‘just’ value, had moral as well as economic implications.

As we have seen, in objective theories of value, the value of the inputs, such as labour, determines the value of the output. With the neo-classicists, that causality is reversed. People value final goods that satisfy specific wants, and it is because those final goods are valued that the inputs that went into making them also have value. Labour does not give goods value; labour is valued because the final good it helps create is valuable. In its simplest variant, value flows from consumption to production, not in the opposite direction. The value of inputs is derived from the value we attribute to the outputs.

Take for example, a consumer who is willing to buy a pair of shoes to wear to work for $100 even though the retail price is only $60. In addition, they are willing to buy an extra pair of the same shoes to wear on the weekend, but are only willing to pay $80 for this second pair because overall they offer less additional benefit given they already have one pair. This consumer receives a total utility of $180 from the two purchases but only pays $120. This $60 difference is considered the ‘consumer surplus’. If the consumer was willing to buy a third pair of shoes (as a back up for when one wears out) but valued this pair at only $60, the total value of the shopping spree would rise to $240 and payment would rise to $180. Consumer surplus, however, would remain at $60 as the third pair was purchased for the exact amount at which the consumer valued them. The value of each subsequent pair of shoes is its ‘marginal value’ and is different from the average total value of the purchases as each pair of shoes is valued differently. Subjectivism says that utility is based on the preferences of the consumer at a given time and place. And diminishing marginal utility means that additional utility decreases with the additional amount consumed or held.

Marshall divided his analysis into four time periods. First, in the market period where time is short and supply is therefore fixed, the value of a good is determined solely by demand. Second, in the short run when firms can change their production runs but not their plant size, supply and demand jointly determine value. Third, in the medium term, where plant size itself can be altered, the effects of supply on value depend on whether the industry of a particular good has constant, increasing or decreasing costs to scale. Finally, in the long run in which technology and population vary, the supply-side conditions dominate.

First, with basically everything priced counted as GDP16 – the shorthand widely used as a measure of national prosperity – there is a risk that the relative value of the future drivers of prosperity is obscured. Objective-based theories of value were careful to make the judgements concerning what was productive. But all that is valued today – that is, what has a market price – is not equally productive or important to future value creation. Moreover, what is considered productive versus unproductive becomes self-fulfilling, as being included in GDP is a marker of productiveness itself. For example, the economist Diane Coyle notes that the view that finance is a strategically important sector of the economy developed alongside changes in statistical methodology that designated it part of national production.

extensive research on the science of wellbeing finds that a wide range of determinants of human happiness (I will use these terms wellbeing and happiness interchangeably) are not priced. These include mental and physical health, human relationships, community and general social climate. This reality means that, even if markets were perfectly competitive and complete, information were equally shared, there were no transaction costs and people were rational, then the sum of their individual utility-maximising transactions would not maximise welfare.

The allocation (or ‘incidence’) of costs and benefits matters, and even ‘if losers lose more than gainers gain in monetary terms, we cannot exclude the possibility that the losers lose less than the gainers gain in welfare terms’. Or in other words, an extra £1,000 means less to Mark Zuckerberg than £500 does to someone on the dole. In part, this can be explained by the diminishing marginal utility of money. There is widespread evidence that, above certain thresholds, small additional monetary gains or losses are relatively immaterial from a welfare perspective, whereas for the least well off they are material.

In the modern financial system, the private financial sector creates most of the money in circulation. The reality of how that happens is different from the standard textbook depictions in ways that are important to maintaining money’s value. Textbooks often state that money is created by new deposits. In this world, the ‘saving’ decision of households creates new money, which banks then lend out. But these deposits have to come from somewhere, and when a household chooses to deposit at a bank, those savings come at the expense of purchases of goods and services of companies (who would then in turn deposit the money in their bank, meaning no net money creation).8 The principal way banks create money is by making a loan. When the bank decides a borrower is creditworthy (that they are likely to pay the loan back), it credits their deposit account for the amount of the loan and new money enters circulation. In making that lending decision, the bank relies on a degree of trust, which after all is the meaning of the Latin credere, the root of our word for credit. Supplementing that trust is the bank’s due diligence of the borrower’s information as well as prudent assessment of the risk. In the words of Mikhail Gorbachev, ‘Trust, but verify.’

Over the ages, the various forms of private money, such as the notes issued by European banks and American banks in the eighteenth and nineteenth centuries, have inevitably succumbed to oversupply and eventual collapse. Initially strong commitments to back their value, by pledging assets and establishing ‘binding’ rules for their issuance, have given in to temptations to increase profits by relaxing these strictures and drawing on credibility built up over time. The decline in public trust and with it the value of the private currency comes, as Hemingway once wrote about bankruptcy, ‘gradually and then suddenly’.

Given the experiences of private banks issuing notes on the basis of ‘their good name’, most observers would agree that laissez-faire is not a good foundation for sound money. There have been two approaches to maintaining public confidence in money and guarding against debasement: i) backing by a commodity, principally gold (and occasionally land or oil) and ii) backing by institutions led by independent central banks.

The system of metal-backed money was plagued by reliance on the unpredictable supply of precious metal. Shortages of silver helped explain why the Roman system of coinage endured to outlive the Roman Empire so that prices were still quoted in denarii in Charlemagne’s time at the beginning of the ninth century. The Spanish conquest of the New World led to the opposite problem. Such was the plunder of gold and silver that the sixteenth century saw a huge monetary stimulus that spread across Europe, pushing up prices sevenfold between the 1540s and the 1640s during the so-called ‘price revolution’.19 The Spanish learned the hard way that acquiring money did not make you rich; the value of precious metals was not absolute. If its supply increased, its purchasing power would fall.

Throughout the period of the Napoleonic Wars, a robust dispute raged over the merits of reinstating convertibility. The Bullionist group – led by David Ricardo and Sir Henry Parnell – argued that if banks were not required to convert into gold, they would issue too many notes, causing inflation and the debasement of money. These arguments anticipated many of those of the monetarist school of economics. The opposing side appealed to the ‘Real Bills Doctrine’, associated with John Law, Adam Smith and James Stuart. They argued that the banknotes would be credible provided the assets that backed them were creditworthy. At this time, those assets were largely gold and bills of exchange (which were used by companies for trade). Since the demand for bills of exchange would be dictated by the activities of commercial firms, it was contended that there would not be excess note issuance, and if any temporary one occurred it would be quickly mopped up. Conversely, if the money supply were restricted to the available gold, it could prove too meagre for commercial activity.

David Hume first described the workings of the gold standard more than a century before it fully came into being. Each time goods were exported, the exporter received payment in gold, which was brought to the mint to be coined. Each time an importer bought a good, they made a payment by exporting gold. For a country with a trade deficit, gold flowed out on net, setting in train a self-correcting mechanism of falling domestic prices because less gold was chasing the same amount of goods. In the foreign country, prices rose because there was more gold chasing the same amount of goods. With imports more expensive, people would consume less of them and more of the now cheaper domestic produce. The trade deficit would shrink and balance would be restored.

By the end of the nineteenth century, global economic power was becoming more dispersed and the gold standard therefore tougher to manage. As international trade and financial integration steadily grew, the UK economy became relatively less important. At the same time, an inherent flaw of the system – its dependence on new supplies of gold – exerted a renewed deflationary bias that put pressure on domestic wages, prices and banks across the membership of the international gold standard. When the supply of gold grew more slowly than the economy, the price level needed to fall to restore equilibrium in purchasing power. This was starkly illustrated when a number of countries adopted the gold standard in quick succession in the 1870s. With less money chasing more goods, the system was highly deflationary, with the British price level falling by more than one-third between 1873 and the end of the century.29 An environment of sharply falling prices and wages would increase the real burden of debts and make it more difficult for banks to remain solvent.

Political pressures began to emerge as suffrage was extended, labour began to organise and political parties representing the working classes began to gain popularity. A single-minded focus on convertibility to the exclusion of the impacts on the domestic economy, particularly on wages and employment, became increasingly untenable. This undermined the credibility of the system, emphasising that the gold standard was ‘a socially constructed institution whose viability hinged on the context within which it operated’.

The value of money requires not just the belief of the public at a point in time but, critically, the consent of the public at all times. That dictates not just what the central bank does to maintain the value of money but how it does it, how it accounts for its actions and how it takes responsibility for any mistakes. In just this way, the effectiveness of the gold standard was ultimately determined by how long it was accepted. When it comes to money, the consent and trust of the public must be nurtured and maintained.

Even to a thirteenth-century Englishman, global monetary conditions mattered. Would Britain’s constitutional history have been different had King John lamented, ‘A central bank! A central bank! My kingdom for a central bank!’? He needed one because other factors reinforced monetary developments, including the usual suspect – financial innovation. Specifically, developments in the common law made land an increasingly liquid asset, and therefore one capable for the first time of being used as a store of wealth.13 This set a medieval financial accelerator in train (about 750 years before Ben Bernanke coined the term)14 by providing an alternative to storing one’s wealth in silver coin (prone to being whisked away by the King). This led to a reduction in the demand for silver money balances. An increase in money velocity would have followed and with it, all else being equal, price inflation until the transactions demand for silver had risen sufficiently to equal its supply. At the very least, the existence of an alternative store of wealth provided an environment in which money velocity could take off, were it to be nudged in that direction.

Magna Carta has become the icon of the principle that the exercise of authority requires permission from those subject to that authority – and that, once granted, this permission can just as easily be withdrawn.

Modern money is not backed by gold, land or some other ‘hard’ asset. Modern money is all about confidence. Confidence that: – the banknotes that people use are real not counterfeit; – money will hold its value and that it will not be eroded away by high inflation; – the burden of debt won’t skyrocket because prices and wages fall in a deflation; – money will be safe in banks and insurance companies, and that it won’t disappear even if there’s a depression, a financial crisis or a pandemic.

The global financial crisis was a powerful reminder of the imperative of financial stability. Advanced economies were in the midst of an era known as the Great Moderation: a long period of uninterrupted growth combined with low, stable and predictable inflation. The crisis made it obvious that central banks had won the war against inflation during this time only to lose the peace.

Conversely, there are no obvious or immediate rewards to the tough decisions necessary to avoid future crises. The costs of macroprudential interventions can be felt today but their benefits are often realised far into the future. These benefits – moderating downturns and avoiding crises – are not directly observable. The bad outcomes that macroprudential policies prevent have to be estimated. But counterfactuals are difficult to sell: ‘it could have been worse’ doesn’t quite have the ring of ‘you’ve never had it so good’.

Just as the gold standard failed when it lost public confidence, the effectiveness of independent central banks will not stand the test of time without continual public support.

Today, this economic approach to value has spread widely. Market value is taken to represent intrinsic value. And if a good or activity is not in the market, it is not valued. We are approaching the extremes of commodification as commerce expands deep into the personal and civic realms. The price of everything is becoming the value of everything.

there is growing evidence that relative equality is good for growth. More equal societies are more resilient, they are more likely to invest for the many not the few, and to have robust political institutions and consistent policies.6 And few would disagree that a society that provides opportunity to all of its citizens is more likely to thrive than one which favours an elite, however defined.

While some studies have found a short-term positive relationship between economic growth and inequality,11 a wide range of research has found that inequality is associated with both slower and less durable growth particularly over the long term.12 This holds for rates of growth over long periods of time,13 the level of income across countries and the duration of growth spells.

The evidence backs the intuition that greater inequality can be self-reinforcing and growth limiting, with fewer investments in their skills by those who are less well-off and less public investment in education and infrastructure to benefit the many.15 Moreover, these negative effects of inequality on growth are self-reinforcing. Income inequality exerts a greater drag on growth in economies characterised by low equality of opportunity (as measured by intergenerational mobility).

There has certainly been no improvement in happiness alongside the spread of markets into more walks of human interaction, and there is no definitive relationship between growth and happiness.20 While there is a variety of potential explanations for these results, one plausible candidate is the steady expansion of the competitive sphere into our lives. Richard Layard bemoans the increasing prevalence of the testing of children and the ranking of education and health professionals. These are approaches that make success personal and individualistic rather than the result of improving the happiness and welfare of others. Evidence suggests that it breeds stress and dissatisfaction, even among the ‘winners’.

Sunstein underscores the importance of a broad concept of welfare: ‘People care about other things, including a sense of meaning or purpose. A good life is not merely “happy”.’25 He uses a series of real-world examples to demonstrate how a simple but common economic application of utilitarianism that focuses on maximising net monetary benefits (and thereby equating money with value) may be inconsistent with net welfare benefits, as a result, for example, of: – the distribution (or incidence) of the gains and losses (recall the non-linear contribution of income to happiness), or – unpriced benefits and costs related to the dignity of life, the avoidance of mental anguish and the hedonic benefits of increased convenience.

The genius of the market rests on a series of attributes that share what John Kay calls the disciplined pluralism of capitalism. This starts with the familiar invisible hand with prices as signals acting as far superior guides to resource allocation than central planning. And it extends to two other key, but less widely acknowledged, qualities. First, markets are forces of discovery via the chaotic process of experimentation through which the market adapts to change. Markets facilitate a process of trial and error where the successful ventures thrive and the unsuccessful are terminated. Second, markets diffuse political and economic power such that entrepreneurial energy is focused on the creation of wealth rather than its appropriation from others.

When our discussion shifted to exchange rates and Tommaso held forth on how the dollar was misaligned, a colleague interrupted, ‘Misaligned to what? The dollar is priced in the world’s deepest market.’ Tommaso drew in a short breath and lamented how far the received wisdom of market efficiency had come. The doctrine held that if a market is deep and liquid, it should always move towards equilibrium, or, said another way, ‘it was always right’. The policymakers have nothing to tell the market, they had only to listen and learn. If markets move sharply away from a range that seems appropriate, the policymakers must humbly admit that there must be something they are missing that causes the market ‘in its infinite wisdom’ to behave the way that it does. But as Tommaso observed, ‘when we grant an entity infinite wisdom, we enter the realm of faith’.

There has been a steady commodification of assets and activities – putting them up for sale – including of our free time.36 Activities as diverse as cooking, essay writing, gardening and child-rearing can now be hired in the gig economy. This is the latest phase in the historical progression of commodification: first agriculture through the commercialisation of surplus production, then manufacturing, then industry and now services, with many people encouraged to do many jobs flexibly. The logical extreme predicted by Paul Mason, in his book Postcapitalism, is that the whole of society becomes the factory.

An essential point is that, just as any revolution eats its children, unchecked market fundamentalism devours the social capital essential for the long-term dynamism of capitalism itself. All ideologies are prone to extremes, and capitalism loses its sense of moderation when the belief in the power of the market enters the realm of faith. In the decades prior to the crisis, such radicalism came to dominate economic ideas and became a pattern of social behaviour.

Yet when the means – money – become the ends, society suffers. Marx saw greed as a stage of social development. In other words, it was neither intrinsic nor natural. Money is an accelerant giving greed an abstract hedonism because the pursuit of its accumulation ‘possesses all pleasures in potentiality’.45 Greed itself is reinforced by the commodification of life as there is more and more that money can buy. Milanović observes that when money becomes the sole criterion by which success is judged, society sends the message that ‘being rich is glorious’ and ‘the means used to achieve glory are largely immaterial – as long as one is not caught doing something illegal’.46

For thousands of years, religion was able to preserve the entrepreneurial spirit necessary for the flourishing of commercial society while internalising certain forms of acceptable behaviour. Protestantism eschewed ostentation, limiting the consumption of the elites and their displays of wealth.47 This in turn encouraged the necessary reinvestment in social and economic capital, as profits were to be used for God and the community or to pursue further gain as was God’s will. To quote Weber: ‘the inevitable practical result is obvious: accumulation of capital through ascetic compulsion to save. The restraints which were imposed upon the consumption of wealth naturally served to increase it by making possible the productive investment of capital.’48 This moderating force was complemented by what Rawls termed a tacit social contract which reaffirms in its daily actions the main beliefs of society.49 Neither of these constraints binds today. The steady decline of religion in the west is well documented. From a commercial perspective, it has reached the point that the Archbishop of Canterbury, the Pope and Rabbi Jonathan Sacks have all sought to reinforce ethical considerations in business life.

As markets reach into spheres of life traditionally governed by non-market norms, the notion that markets never taint the goods or activities they touch becomes increasingly implausible. Consider three examples with respect to children. The first is the famous case of a day-care centre in Israel, where it was decided to introduce fines for parents who were picking up their children late and inconveniencing the day-care staff who had to stay late.56 In response, the incidence of late pick-ups rose sharply. The fine was viewed as a fee, removing the social stigma of making teachers wait. Instead, parents were covering the cost and optimised their time accordingly. The second (referenced by Sandel) is giving in to the temptation to pay a child to read a book. This not only puts a relative price on reading compared to staying on their mobile phone but also signals that reading is a chore that must be compensated for rather than an intrinsic good to be enjoyed. When everything becomes relative, nothing is immutable. The third is paying children to raise money for charity. Building on their observations at the day-care centre, the economists Uri Gneezy and Aldo Rustichini conducted an experiment to determine the impact of financial incentives on student motivations.57 They divided high-school students into three groups. The first was given a motivational speech about the good cause they would be supporting as they canvassed their neighbourhood for money. The second and third received the same speech but were offered incentives (paid by a third party, so with no impact on net proceeds) of 1 per cent and 10 per cent of proceeds raised, respectively. Not surprisingly, the group with the higher incentive was more motivated and raised more money than the lower-paid cohort. But the group that responded only to charitable and civic virtue raised the most. Money had crowded out civic norms. These examples suggest that, before putting a price on a good, consideration should be given to whether this will alter its meaning.

when bankers became detached from the end users of financial products, their only reward was money. But purely financial remuneration ignores the non-pecuniary value of employment, such as satisfaction from helping a client or colleague succeed. This reductionist view of the human condition is a poor foundation for ethical financial institutions needed to support long-term prosperity. The global financial crisis was as much a crisis of culture as of capital.

Early on in my career in finance, I was taught an invaluable rule by Bob Hirst, one of the partners at Goldman Sachs: ‘If something doesn’t make sense, it doesn’t make sense.’ Beneath the Popeye-esque tautology was real wisdom. Bob’s point was that if someone explains something to you in finance – such as a flashy new product or why a company’s valuation should be orders of magnitude higher than others in their sector – and it doesn’t make sense, ask the person to repeat the rationale. And if following that response, it still doesn’t make sense, you should run. Run because in finance you should never buy simply on trust, just to go along with the crowd, or least of all to pretend that you understand something for fear of looking foolish. Run because there are really only two possibilities. The first is that you’re being sold something that really doesn’t make sense. It’s merely a form of financial alchemy in which debt is being turned into equity, the newest version of the mythical risk-free return, or the latest variant of the four most expensive words in the English language, ‘This time is different.’

Whether it made sense for investors to buy ABCP boiled down to two risks. The first, liquidity risk, refers to the ability to sell an asset or to borrow against its value. In deep markets, sales by individual investors will have a minimal impact on the asset’s price, and in many cases the asset can even be turned into cash by borrowing against its value. But when markets are thin or shallow, it can be tough for investors to realise cash when they need it. In the extreme, liquidity risk is the market analogue of a bank run, except that in markets there are no lenders of last resort like central banks and investors aren’t protected by a safety net, whereas retail depositors in banks benefit both directly from deposit insurance and indirectly from central bank facilities that help banks to weather storms.

the lifeblood of markets is transactions. Markets act as intermediaries between savers and borrowers but maintain relationships with neither. Consequently, market instruments are more robust when the underlying product is more standardised. Determining whether an activity is best financed through a bank or a market depends on the relative benefits to that activity of specialisation versus standardisation. In response to rising competitive pressures from markets, banks increasingly became direct participants in them, in ways that ultimately sowed the seeds of the crisis. First, banks relied more and more on short-term markets to fund their activities and, in the process, substantially boosted their leverage. This made banks dependent on continuous access to liquidity in money and capital markets. That reliance was brutally exposed when markets turned in the autumn of 2007. Second, banks used securitisation markets, like ABCP, to straddle relationship banking and transactional market-based finance. Under the originate-to-distribute business model, banks originated a set of loans, repackaged them as securities and sold them to investors. In essence, banks took specialised loans and sold them in standardised packages. While securitisation promised to diversify risks for banks, this risk transfer was frequently incomplete. Banks often sold securities to arm’s-length conduits, like SIVs, that they were later forced to re-intermediate or they held on to AAA tranches of complex structures that proved far from risk-free.

the market can be wrong longer than you can stay solvent. Appeals to fundamental values in a panic fall on deaf ears. Not least because people find it tough to hear when they’re screaming. This causes a number of challenges. When markets collapsed in the autumn of 2008, markets were hoist on their subjective value petards. If the market was always right and the market said subprime was worth one-third of its former value, then the balance sheets of many US and European banks were insolvent, even if most of the mortgagees were making their payments. The big institutions that lent to banks in the capital markets began to perform such mark-to-market calculations, and then withdrew their funding, turning liquidity problems into solvency ones overnight.

This leads to the final lesson I learned about managing crises: the importance of overwhelming force. Fighting a financial fire with half-measures is futile. Whether it was Hank Paulson’s $750 billion bazooka in 2008, or Mario Draghi’s ‘whatever it takes’ pledge a few years later at the height of the euro crisis, effective crisis-fighting measures need to be massive, institutionally grounded and credible. Ultimately, overwhelming force can only come from the state. This is when public values come into their own. Resilience, responsibility and solidarity. Taking tough action in the public interest was essential to restoring confidence.

some of the mistrust in globalisation arises from what Dani Rodrik termed an impossible trinity – a trilemma – between economic integration, democracy and sovereignty.

A major bank CEO once told his daughter a financial crisis is ‘something that happens every five to seven years’.7 In no other aspect of human endeavour do people not strive to learn and improve. And in no other industry would such weary fatalism be tolerated. This depressing cycle of prudence, confidence, complacency, euphoria and despair reflects the power of the three lies of finance: this time is different, markets always clear, and markets are moral. To break their seductive power, we need to reinforce the underlying values required for the financial system to fulfil its role as a servant, rather than master, of society.

The second lie is the belief that ‘markets always clear’. That is, the supply of whatever is traded will always equal demand for it, and at the ‘right price’ there will never be excess supply or demand. This belief that markets always clear has two dangerous consequences. First, if markets always clear, they can be assumed to be in equilibrium – or, said differently, ‘to be always right’. If markets are efficient, then bubbles cannot be identified nor can their potential causes be addressed. Second, if markets always clear, they should possess a natural stability. Evidence to the contrary must be the product of either market distortions or incomplete markets.12 Such thinking dominated the practical indifference of policymakers to the housing and credit booms before the crisis.

A truth of finance is that the riskiness of an asset depends on who owns it. When markets don’t clear, agents may be surprised to find what they own and for how long. When those surprises are – or are thought to be – widespread, panic ensues.

Cass Sunstein’s work on social movements could help explain why (what appear to have been) widely held beliefs can be subject to sudden reappraisals. There is considerable evidence that changes in social norms, like reported attitudes to same-sex marriage or even political revolutions, often happen suddenly. Sunstein identifies several factors that explain this phenomenon. These include preference falsification, which is when what we are willing to say publicly diverges from what’s inside our heads, and interdependencies, which is when what we are willing to say or do depends on others. These characteristics mean that once conditions ripen, a critical mass of new opinions can form quickly, sometimes with brutal consequences. And so it is with financial markets.

As the old fault lines close in advanced economies, however, they are widening in some emerging market economies. For example, while China’s economic miracle over the past three decades has been extraordinary, its post-crisis performance has relied heavily on a large build-up of debt and an associated explosion of shadow banking. The non-bank finance sector has increased from around 10 per cent of GDP a decade ago to over 100 per cent now, with developments echoing those in the pre-crisis US such as off-balance-sheet vehicles with large maturity mismatches, sharp increases in repo financing and large contingent liabilities of borrowers and banks.

Under the SMR, the most senior decision makers of banks, insurers and major investment firms are now held individually accountable if they fail to take reasonable steps (including training or proper oversight) to prevent regulatory breaches in their areas of responsibility. Whether actions taken by a senior manager were reasonable can be determined by reference to select voluntary codes that the FCA has publicly recognised. And under the related Certification Regime firms must annually assess and certify the fitness and propriety of a wide range of risk-taking employees.

The most fundamental duty of the state is to protect its citizens. In his classic text, Leviathan, Thomas Hobbes (1588–1679) described how citizens give up certain liberties in exchange for state protection ‘from the invasion of foreigners, and the injuries of one another, and thereby to secure them in such sort as that by their own industry and by the fruits of the earth they may nourish themselves and live contentedly’.

Our brains often work against us when it comes to making the longer-term investments necessary to withstand catastrophes when they strike. Research in behavioural psychology has established that humans have a host of cognitive biases that mean we undervalue resiliency. We display a present bias and discount problems and benefits that will occur in the future, preferring immediate rewards even if they are lesser in overall value.

First, unlike most consumer goods, life is what some economists term a non-positional good. That means that no part of a life’s value stems from the ownership of comparable goods by others. We do not feel any better off when those around us have less life, though we may feel better off when we have a nicer car. In contrast, drawing on a host of evidence from behavioural trials, Robert Frank posits that the value of many consumption goods is partly based on how they affect the person’s actual or perceived position.

The role and duties of government are formulated by citizens, yet we increasingly rely on market-based metrics of value to dictate policy instead of societal values driving government action. At the heart of Covid policy decisions have been forms of valuation of life, quality of life and dignity in death, even if those determinations have been implicit. Framing these in terms of cost–benefit analysis immediately brings challenges with estimating monetary values for these sacred values. Policy decisions must also weigh fundamental issues of fairness including the incidence of the disease and of economic hardship as well as the importance of preserving economic dynamism.

state’s actions are judged for their proportionality and against a standard in which trustworthiness, solidarity and a sense of fairness form the basis of an effective response. States embodying these values can weather crises not by threatening punishment but by relying on the voluntary contributions of their citizens. This is where the soft powers of the state such as legitimacy and reciprocity, as well as broader social capital, matter most, and where the values of government and citizens take on a life-and-death importance.

A state’s legitimacy derives from the beliefs its citizens hold about the structure of government, its officials and processes. Whether a state’s rules and regulations merit compliance depend on how those rules were decided upon and by whom.8 Behavioural compliance by citizens stems from their sense of obligation and willingness to obey authorities, particularly in cases where compliance is against the citizen’s immediate self-interest. This value-based legitimacy stems in turn from judgements and perceptions of the extent of procedural justice present and the general trustworthiness of government, with trustworthiness in government formed by views on government performance, leadership motivations and administrative competence.

First, the crisis will likely accelerate the fragmentation of the global economy. Until a vaccine has been widely applied, travel restrictions will remain. Even afterwards, local resilience will be prized over global efficiency. Second, much of the enterprise value of companies will be taken up by lost cash flows and extraordinary financial support. This higher debt – unless it is restructured, extended on concessional terms or forgiven – will increase the riskiness of the underlying equity and weigh on capacity for growth. More profoundly, the financial relationship between the state and the private sector has already expanded dramatically. How smooth will be the exit? Or will the state remain enmeshed in commerce, restraining private dynamism? Third, the searing experience of the twin health and economic crises will change how companies balance risk and resilience. We are entering a world where businesses will be expected to prepare for black swans by valuing anti-fragility and planning for failure. The financial sector learned these lessons the hard way during the global financial crisis, which is why banks can now be part of the solution. Going forward, which company will operate with minimal liquidity, stretched supply chains and token contingency plans? Which governments will rely on global markets to address local crises? Fourth, people’s economic narratives will change. After decades of risk being steadily downloaded on to individuals, the bill has arrived, and people cannot even begin to pay it. Entire populations are experiencing the fears of the unemployed and sensing the anxiety that comes with inadequate or inaccessible healthcare. These lessons will not be forgotten quickly. This will have lasting consequences for sectors that rely on levered consumption, a booming housing market and a vibrant gig economy. This points to a final, deeper issue. In recent decades, subtly but relentlessly, we have been moving from a market economy to a market society. Increasingly, to be valued, an asset or activity has to be in a market; the price of everything is becoming the value of everything. This crisis could help reverse that causality, so that public values help shape private value. When pushed, societies have prioritised health first and foremost, and then looked to address the economic consequences. We have acted as Rawlsians and communitarians not utilitarians or libertarians. Cost–benefit analyses, steeped in calculations of the Value of Statistical Lives, have mercifully been overruled, as the values of economic dynamism and efficiency have been joined by those of solidarity, fairness, responsibility and compassion.

Among the greenhouse gases (including methane, nitrous oxide and fluorinated gases), CO2 is the most problematic. It accounts for three-quarters of the warming impact of emissions, and it is the most persistent of the greenhouse gases, with a significant proportion of the carbon emitted today remaining in the atmosphere for centuries.

The size of the carbon budget depends on (i) the temperature outcome, and (ii) the degree of uncertainty (that is, probability assumed to the outcome). The IPCC reports are the most well-respected and commonly cited source on carbon budgets. In 2018, the IPCC estimated a range from 420 Gt (to achieve 1.5°C with 66 per cent probability; this would be exhausted in less than a decade at current emissions) to 1,500 Gt (to achieve 2°C with 50 per cent probability; this would be exhausted in about three and a half decades at current emissions). Limiting temperature increases to 1.5°C from pre-industrial levels keeps the earth’s climatic and natural systems from tipping into a dangerous feedback loop. For example, the IPCC projects that if temperatures increase even by 2°C, 1.7 billion people could experience more severe heatwaves, sea levels could rise another 10 centimetres, coral reefs could decline by as much as 99 per cent.

The biggest contributors to emissions and those with the most distance to travel to get to net zero are: – Industrial process (32 per cent of current emissions), such as the production of manufactured goods, chemicals and cement. These emissions have increased 174 per cent since 1990. – Buildings (18 per cent of current emissions), which use energy for electricity and heat generation. – Transport (16 per cent of current emissions), which includes energy used by cars, heavy goods vehicles and the shipping and aviation industry. Transport emissions alone have grown by 70 per cent in the past two decades. – Energy generation (11 per cent of current emissions) – the production and supply of energy, not its end use. – Food and agriculture/nature-based sources (10 per cent of current emissions), of both crops and livestock.

The entrepreneur and engineer Saul Griffith argues that the carbon-emitting properties of our committed physical capital mean that we are locked in to use up the residual carbon budget, even if no one buys another car with an internal combustion engine, installs a new gas-fired hot-water heater or, at a larger scale, constructs a new coal power plant.12 That’s because, just as we expect a new car to run for a decade or more, we expect our machines to be used until they are fully depreciated. If the committed emissions of all the machines over their useful lives will largely exhaust the 1.5°C carbon budget, going forward we will need almost all new machines, like cars, to be zero carbon. Currently, electric car sales, despite being one of the hottest segments of the market, are as a percentage in single digits. This implies that, if we are to meet society’s objectives, there will be scrappage and stranded assets.

Climate change creates both physical and transition risks. Physical risks arise from the increased frequency and severity of climate- and weather-related events (such as fires, floods and storms) that damage property, destroy crops and disrupt trade. When physical risk crystallises it can damage real property, disrupt human and natural systems and impair financial values.

Although few outside the industry know it, the Bank of England regulates the world’s fourth-largest insurance industry. When I became Governor, I soon realised that insurers are on the front line of climate change. With their motives as global citizens sharpened by commercial concerns, insurers have some of the greatest incentives to understand and tackle climate change in the short term. For example, Lloyd’s of London underwriters are required to consider climate change explicitly in their business plans and underwriting models. Their genius has been to recognise that past is not prologue and that the catastrophic norms of the future are in the tail risks of today. With such insights, it is perhaps not surprising that the insurance sector has been particularly active in organising itself to address these existential issues.

The second category of climate-related financial risk is transition risk. These risks arise as the result of the adjustment towards a lower-carbon economy. Changes in policies, technologies and physical risks will prompt reassessments of the value of a large range of assets as the costs and opportunities of the transition become apparent. The longer meaningful adjustment is delayed, the more transition risks will increase. The speed at which the adjustment to a net-zero economy occurs is uncertain and could be decisive for financial stability. There have already been a few high-profile examples of jump-to-distress pricing because of shifts in environmental policy or performance. The combined market capitalisation of the top four US coal producers has fallen by over 99 per cent since the end of 2010, with multiple bankruptcies. To meet the 1.5°C target, more than 80 per cent of current fossil fuel reserves (including three-quarters of coal, half of gas, one-third of oil) would need to stay in the ground, stranding these assets. The equivalent for less than 2°C is about 60 per cent of fossil fuel assets staying in the ground (where they would no longer be assets).

Importantly, current estimates are incomplete as the impact of climate change on numerous important issues – water resources, transport, migration, violent conflict, energy supply, labour productivity, tourism and recreation – has received limited attention, and no estimate includes them all. These omissions bias downwards the estimates and strengthen the case for GhG emissions reductions.

The classic problem in environmental economics is the tragedy of the commons. This arises when individuals, acting independently in their own self-interest, behave contrary to the common good of all users by depleting or spoiling the shared resource through their collective action. There are many examples, including overfishing, deforestation and the original unregulated grazing on the common lands of England and Ireland in the early nineteenth century. The tragedy of the commons is an extreme example of negative externalities: when an action affects third parties who did not directly participate in (nor benefit from) that action. Such is the case with the ultimate global commons – our climate and biosphere, where producers generally do not pay for the carbon dioxide they emit nor consumers for the carbon they consume. There are three solutions to the tragedy of the commons: pricing the externality, privatisation (through the assignment of property rights) and supply management by the community that uses the commons.

In a net-zero-carbon economy, electricity’s share of total final energy demand could rise from today’s 20 per cent to over 60 per cent by 2060. That means total global electricity generation must increase almost fivefold by mid-century, while ensuring it is generated by renewables.

These developments suggest that, in a number of societies, demands for sustainability are reaching tipping points that, while not predestined, can be achieved. Research into social movements shows how they can lead to multiple equilibria. Many social movements that had seemed improbable unexpectedly gain traction due to a combination of factors including preference falsification (what we say publicly diverges from what is inside our heads), diverse thresholds (different people are more willing to speak out before others), interdependencies (what we are willing to say depends on others) and group polarisation (people tend to become more extreme when they come together with like-minded people).14 Within a few years, views that were publicly on the fringe become mainstream. Just as de Tocqueville believed that ‘no one foresaw the French revolution’, John Adams and Thomas Payne were surprised when the American colonies revolted. Yet diary writings at the time in both countries reveal the breadth of private dissatisfaction.15 What people thought and said were very different, until a focal point emerged and the private became public and was radicalised. Interdependencies – once a critical mass had formed – fanned the rapid spread of the Me Too movement, so that a host of crimes long concealed suddenly came to light. Behavioural science has also shown that, if people learn about a new or emerging social norm, they are more likely to adopt it (for example, the current spread of veganism in some countries).

The precise combination of physical or transition risks that materialises depends largely on the policy responses to climate change. For example, a decisive shift in policy will limit the size of physical risks but create some transition risks, while a business-as-usual scenario will be dominated by more severe physical risks.

In order to support an efficient global response to climate change, the level of ambition of national strategies will need to converge over time. In the meantime, carbon border adjustments (a form of tariff linked to relative climate effort) would allow leading countries to pursue more ambitious targets, while avoiding carbon leakage. These adjustments should be designed in a way that is fully consistent with World Trade Organisation rules.

Credible policy frameworks reduce the risk that businesses form wrong expectations about future policies and continue to invest in obsolete technologies. By setting out clear strategies, politicians can provide forward guidance on the policies they plan to put in place. Such predictability of climate policy helps companies start adjusting to the reality of a net-zero world today, and ensures that this adjustment is orderly.

Bernard Bass identified four components of transformational leadership: 1) Intellectual stimulation. Transformational leaders not only challenge the status quo; they also encourage creativity among colleagues. 2) Individualised consideration. Transformational leaders support and encourage individual followers by keeping lines of communication open so that colleagues feel free to share ideas and receive direct recognition of their unique contributions. 3) Inspirational motivation. Transformational leaders articulate a clear vision and inspire passion to fulfil these goals. 4) Idealised influence. The transformational leader serves as a role model, encouraging colleagues to emulate and internalise the leader’s ideals.

So, rather than professing false certainty and risk being wrong, it is argued that being candid about uncertainty could build the credibility of experts over the long term. As André Gide said, ‘Trust those who seek the truth but doubt those who say they have found it.’

Many of the ways to rebuild trust in experts resonate with what is required of effective leaders. Humility, candour about the limits of expertise, effective transparency and clearer communication. Engaging widely and seeing issues from the perspectives of others.

True leadership is not an end in itself but rather a means to accomplishing a worthwhile goal.

During the global financial crisis, some fretted that actions to save a crumbling system would encourage reckless behaviour in the future. But Ben Bernanke was clear that invoking moral hazard in the middle of the US financial crisis was misguided and dangerous. Using the power of narrative, he challenged the arguments of the ‘moral hazard fundamentalists’ in his oft cited and simple hypothetical example: do you let the man who smoked in bed die in the burning house to teach him a lesson? Or do you save him, stop the risk of surrounding houses catching fire and then reprimand him for reckless behaviour?

Now authorities need to apply these lessons to the climate crisis by stress-testing banks and insurers against different climate pathways from a smooth transition to net zero to the catastrophic business as usual. Critically, this will help banks think through potential risks associated with both the transition to net zero and continuing business as usual. With three-quarters of the world’s known coal reserves, half of gas reserves and one-third of oil unburnable if we want to keep emissions below 2°C,8 uncovering information about company exposures to stranded assets will be critical. Climate stress-testing will reveal the financial firms – and by extension the companies – that are preparing for the transition. And it will expose those that have not.

Shareholders may not be owners in the classic sense but they are the residual claimants in a company. Simply put, they get paid after everyone else – creditors, employees, suppliers and governments (in the form of taxes). This position in the hierarchy has underpinned much of the legal approach to entrenching shareholder primacy. Whether the shareholders take the most risk is a more open question. As Martin Wolf has argued, employees cannot diversify their exposure to a company.13 The same truth can hold for key suppliers or communities in which a company is dominant. When this is combined with the doctrine of shareholder primacy, there are incentives for firms and management (if their compensation is heavily weighted towards short-term equity incentives) to take excessive risks.14 There is an incentive for shareholders to take on greater risk since their downside is limited (they cannot lose more than all of their money under limited liability), but their upside is unlimited. This shifts risk to other claimants, notably employees and creditors.15 A similar dynamic holds for externalities, such as pollution.

Corporations own themselves, and central to British company law (since the nineteenth century) and American company law is the doctrine of corporate personality. The company is an entity independent of its managers, shareholders, employees and creditors. Its directors thus serve its interests; they are not merely agents working on behalf of shareholders.

Thus purpose operates on a number of planes. First, internally, it creates the necessary social capital within the firm to underwrite foundations of value creation: tightly functioning teams, and high employee participation and engagement. Second, externally, it operates as a means of generating focus on customer service and alignment. The company’s external focus relates to the traditional purpose of a company: to serve its customers.50 If a firm does this well, it generates customer loyalty, and with time the consumer will become a stakeholder, reinforcing trust, good faith and fair dealing. Third, purpose operates as a social narrative, in communities and societies beyond the firm, helping to create and sustain the firm’s social licence to operate. At the highest level, purpose captures the moral contribution of companies to the betterment of the world now and in the future.

The vast majority of ESG assets seek to ‘do well by doing good’ by using ESG criteria to identify common factors that support risk management and value creation in order to enhance long-term risk-adjusted returns in a form of divine coincidence. These strategies encompass both responsible investing, which largely uses ESG for risk mitigation, and sustainable investing, which adopts progressive ESG practices that are expected to enhance long-term economic value. Impact investing seeks to support positive social or environmental benefits alongside financial returns. It is distinguished by measuring social and environmental outcomes as rigorously as financial outcomes, and by pursuing additionality which means concentrating on investments that catalyse social or environmental change. So an impact strategy focused on accelerating the transition to a net-zero economy would not simply invest in existing green assets but rather develop new renewables projects or help companies invest to reduce their carbon footprint.

In order to achieve their objectives, investors pursue different strategies such as positive screening for best-in-class performance on ESG factors; negative screening for those that perform poorly; and momentum investing in companies that are improving aspects of their ESG performance. Deeper analytics can support systematic approaches to shared value that identify the social impacts that are closely tied to a company’s competitive advantage. Within these strategies, there are three main approaches to applying ESG factors: – ratings-based where assessments of ESG performance are outsourced to a third-party provider; – fundamental value in which raw ESG data is analysed, as part of an integrated assessment of the relationship between the creation of sustainable and enterprise value; and – impact assessments which measure and report the wider impacts on society while targeting specific positive social impacts alongside financial returns.

The rating systems of data vendors can vary dramatically, leading to substantially different ratings of the same company. For example, a 2020 study found that the correlation between the overall ESG ratings of six rating providers is about 0.46, so only about half the time would a rating provider come up with the same assessment.24 The average correlation is lowest for the governance (0.19) and highest for the environmental factors (0.43). More profitable firms are subject to lower ESG rating disagreements, while firms without a credit rating have higher disagreements. A 2019 study found the level of ESG disagreement for a given firm has increased over the same period.

Shared-value companies make a different set of choices from their competitors, building a distinctive social impact into their business models. Shared value can affect strategy on three mutually reinforcing levels: (1) creating new products that address emerging social needs or open currently unserved customer segments; (2) enhancing productivity in the value chain, whether by finding new efficiencies or by increasing the productivity of employees and suppliers; and (3) investing to improve the business environment or industry cluster in the regions where the company operates.27 Note the contrast to a ratings-based approach which leads many investors either to adopt a mechanistic index strategy or to use a company’s overall ESG performance as a final screen to reduce risk.

The ten years following the global financial crisis marked the first lost decade for real incomes in the UK since the middle of the nineteenth century. Substitute platforms for textile mills, machine learning for the steam engine, and Twitter for the telegraph, and current dynamics echo those of that era. Then, Karl Marx was scribbling the Communist Manifesto in the reading room of the British Library. Today, radical viral blogs and tweets voice similar outrage.

We are living Lenin’s observation that there are ‘decades when nothing happens and weeks when decades happen’.

The following conclusions of Tharman Shanmugaratnam, Singapore’s Senior Minister, put fiscal trends into a disturbing longer-term context: There has been a drift in fiscal policy, in a whole range of countries, towards individuals rather than public goods and towards the short term or the next electoral cycle rather than the long term. For instance, in the 1960s 75% of the US budget went into public goods of one form or another – infrastructure, schools, hospitals, transport and so on. And 25% went in some form of benefits to individuals. Today it’s exactly the other way around – 75% to individuals, and 25% on public goods. That is inherently short term. It sometimes solves immediate problems – but it doesn’t lead to a better long-term future and it doesn’t lead to optimism. If you don’t invest in public goods, and people can’t see that you’re investing for the long term, then it’s very hard to get a more optimistic society. You get a society where people are constantly concerned about ‘how much do I get compared to someone else’.

At the same time, authorities need to recognise that inflation will return, particularly because Covid represents a major negative supply shock. Significant capacity has been destroyed, and a tough adjustment is underway. The twin risks of fiscal dominance – where central bank policies are dictated by the spending priorities of the state – and financial dominance – when central bank policies are driven by a perceived need to support financial markets – will rise over coming years. In this environment, it is more important than ever that independent authorities assess and address risks to monetary and financial stability. In an environment where many assume that interest rates will stay low forever and that authorities will always bail out markets under stress, a more active and holistic approach to managing risks in market-based finance is imperative.

Institutions have been found to be more important than either geography or international trade in explaining economic growth.17 Good institutions encourage productive activity, lower transaction costs by establishing norms, reduce uncertainties and discourage behaviours that impair economic growth. Bad institutions lead to a culture of corruption and rent seeking.

stagnation in western nations can be attributed to institutions that protect the status quo and inhibit growth.24 His examples include banks that were overregulated and too big to fail, and US public schools captured by teachers’ unions. To Ferguson, western businesses suffer not from a culture of unofficial rent seeking but from onerous regulation and expensive legal fees that restrict economic activity.

There is reason to worry that leading technology companies could decide how institutions evolve, thereby locking in their advantages and discouraging creative destruction. Nations – not companies – must set these ground rules for markets to be fair and for market participants to take their responsibilities. States need fair rules enacted and maintained by fair processes, held together by both formal structures and informal conventions, resistant to capture and adaptable to changing circumstances.

Financial markets can be particularly vulnerable because of the temptations of liquidity illusion and the reliance on a strategy of being able to get out before the greater fool. For example, asset-management vehicles that promise daily liquidity to their clients while investing in fundamentally illiquid assets (like corporate loans) were prone to fire sale risk and were saved only by the prospect of massive Fed intervention in the spring of 2020. I know from experience that a booming economy can give the illusion of lower risk, feeding beliefs that potential growth is both stronger and more sustainable than it is. Risks are often the greatest when they seem the least.

The green investment opportunity – amounting to tens of trillions of dollars over the next decade – brings together a unique combination of factors: – potential consumer caution, pressures on employment and weaker export markets could all mean that investment will determine the strength of most economic recoveries; – the low-for-long interest rate environment means large-scale public investment is possible, despite record fiscal expenditures to fight the Covid crisis (provided the transition from Covid to Capital begins soon); – the largest investment opportunities for the next decade all involve accelerating the transition to a net-zero economy; in parallel, these investments will create high-paying jobs across the country while advancing competitiveness in the industries of the future; and – the global private financial sector increasingly sees the transition to net zero as the future of finance.

Many remember Schumpeter’s phrase ‘creative destruction’ but forget its context. The core of his voluminous writings was his view that capitalism was prone to ossification. In ‘the treason of the clerks’, large companies tend to become self-perpetuating bureaucracies. When coupled with the natural tendencies of incumbents towards rent seeking – seeking the rewards of value created by other people – the treason of the clerks can quell the creative gale. This is more likely to happen if public policy is pro-business rather than pro-market – that is, if it concentrates on the needs of incumbent firms to the detriment of new entrants. The more decentralised an economy is, the more dynamic it can be, and, by definition, the more the leaders in economic sectors change as good new ideas come to market. In contrast, concentration leads to rent seeking and efforts to entrench existing advantages.

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Summer Trip to Gaspesie and Tadoussac, Quebec

The pandemic has prevented most people from travelling abroad over the past year and a half, with most of us caged in our home and varying restrictions imposed depending on the virus spread. After undergoing through multiple lockdowns, the healthcare situation in Canada has finally started to improve dramatically in June (2021) and the region is classified as “green” – meaning that only indoor mask wearing is being enforced and travelling across provinces is now allowed. Our last trip was in October 2020, when we went camping in the Parc National du Bic on the North of Quebec City, and we felt another vacation was due.

Since travelling overseas is out of the question – due to mandatory quarantine requirement, still poor pandemic situation in South American countries, and us waiting for the second vaccination dose – my girlfriend and I decided to take a trip to the North-East of Quebec’s Gaspesie Peninsula, part of Canada that my French professor once said is the most beautiful place she has ever been. Intrigued, we planned our trip 1.5 month in advance and took the trip at the end of June to early July to benefit from the multiple public holidays during the period.

Day 1: Montreal – Quebec City – Rimouski

We began driving from Montreal at around 9am heading to Quebec City on the Quebec day, expecting the city to be lively and crowded amid the long weekend – which was confirmed when we had our brunch in La Buche, a restaurant in the old city nearby the Fairmount Hotel. We took a relaxing walk after the meal to see the city for the first time after the pandemic and were happy to find some of our favorite restaurants still operating, which we plan to visit at the end of our trip.

Quebec City in the Summer

Feeling full and ready to drive again, we walked back uphill to our parking spot nearby Abraham Plain and hit the road for another 3 hours before arriving in Rimouski. One thing that we would recommend before going to Rimouski is to book a restaurant in advance when planning to have a nice dinner, as there are few decent restaurants in the city that has table for walk-ins. We tried walking in to Arlequin and Narval only to found both restaurants are fully booked for the night. Hungry and tired, we went to a restaurant we dined a year earlier, Pacini, and had some pasta and wine to close our first day.

The City is Lively Despite of the Pandemic

Day 2: Rimouski – Jardin Metis – Saint Anne des Monts

I woke up early today to catch the sunrise and was planning to fly my drone alongside the city’s boardwalk only to find that almost 75% of the downtown area is restricted due to its proximity to the airport, so I headed back to the room and read my emails until my girlfriend woke up. For our breakfast, we found a nice bakery called Pâtisseries & Gourmandises d’Olivier in the downtown area, which I would rate as on par with the quality of bakery in Montreal – based on their chocolatine.

Our first stop of the day is Jardin Metis, a private-run garden complex that is also hosting Festival International du Jardin in the Summer months. The entrance fee at CAD$22/person is quite steep but fair considering the size and maintenance they did on the area. Although not a botanist myself, I did enjoy walking around the garden and see the variety of flowers displayed. Going through the whole garden at a leisure pace took us a bit less than 3 hours, but it was already noon, so we decided to eat at the café (not restaurant, which is hosted at a different place) inside the complex. But be warned that the choice of meal they offer might not be to your liking and the portion is rather small – the food quality is indeed very good, but probably better served in a 4–5-star hotel rather than in a tourist area.

A Gardener in Jardin Metis
A patio on the Backyard in Jardin Metis

We drove for another 2 hours to Saint Anne des Monts, initially thinking that we could do a short hiking on the Gaspesie National Park. But we felt tired already and the weather was a bit cloudy, so we did an early check in instead. This time our hotel, Village Grande Nature Chic-Chocs, is located not in the city/town but is on the mountain, which requires another twenty minutes drive on an unpaved road to reach. It is located on top of a hill facing the big mountain, which is perfect for me to fly my drone, and the air is much cooler than in Rimouski. There is very little signal/wi-fi coverage in the area, leaving us with few options but to have a pleasantly long 3-course dinner with a wine until the sunset at the hotel’s restaurant. Surprisingly, despite being the only restaurant in 5 Km radius, the food is decent and well-priced.

An Aerial View of Our Hotel in Saint Anne des Monts
Gaspesie National Park, Saint Anne des Monts

Day 3: Saint Anne des Monts – Forillon National Park – Gaspe

Today is the beginning of our trip in the Gaspesie peninsula and we were excited to finally be on the oceanside of Gulf of St. Lawrence. Trailing the unpaved road passed yesterday, we found ourselves back on the road to Forillon National Park – probably the only national park located next to an ocean in Quebec. We did few stops in between and took pictures on the landscape before stopping for an early lunch at Cantine du Pecheur, a small seafood stores recommended by my girlfriend’s colleague.

On the Road to Forillon, Gaspesie
Cantine du Pecheur, Our Lunch Spot

There is a large building worth visiting on the entrance to Forillon National Park where we did a toilet stop and bought our tickets and few souvenirs. But more importantly, there is a short walking trail behind the building with beautiful landscape of the ocean and peninsula that should not be missed. Our guide at the ticket booth recommended two hiking options for us, Mont Saint-Alban and Les Graves trail. The former will end up with the peninsula view at the top and the later is the trail alongside the coast; we chose the later and did not regret it.

Due to its proximity to water and nice weather, it was probably one of the most pleasant hiking experiences in Quebec we did so far. After reaching the end of the big trail where a lighthouse is located, there is a smaller trail to go down to the bout du monde about 15 minutes away. I flew my drone there to capture the surrounding landscape.

For sunset, we drove to a beach and hiking trail still inside the national park called La Taiga. From there, we could see the downtown area of Gaspe across the bay. That, in retrospect, was not a good decision. Initially the trail was nice and paved with a giant wooden bridge crossing the swamp area. But as we walked further, not only there are more worms hanging from the tree on the hiking path, but there are also significantly more mosquitos! My girlfriend and I are two large meats there for their dinner. We ran our way to the end of the trail and back, but still found numbers of mosquito bites afterwards. The bottom line is to wear long-sleeve shirt and trousers when visiting.

Tourist Centre at Forillon National Park
A Short Trail on the Back of the Tourist Centre
Les Graves Hiking Trail at Forillon National Park

It took us less than 30 minutes drive from La Taiga trail to downtown Gaspe, but on our way there we found that many of the restaurants are closed before 10pm, so we have only 2-3 hours to find one if we want to avoid eating instant noodles in our hotel room. As we checked in our hotel, we found good and bad news. The good news is that there is a very nice restaurant facing the canal called Tetu in our hotel. The bad news is they are fully booked until 9pm, which we took on the spot. Again, we found ourselves regretting not booking any of the restaurants in advance, preferring more flexibility on our schedule.

It was Saturday night, which explains why so many locals are also dining there and when our reservation time comes none of the waitresses are available to seat us despite having many empty tables – everybody was busy serving seated clients and the waiting line was getting longer and longer. We were told to come back in 15 minutes, but when we did it is only after we got slightly mad that we got seated. Luckily, the service becomes much better once we ordered our food. The food was amazing and the beer choice was equally interesting. Despite earlier trouble, we both agreed that it is the best meal we had during the trip. It was so good that plan to find similar short beef brisket in Montreal once we got back home.

Day 4 : Gaspe – Perce

Our comfortable hotel room does not stop us from waking up early. Since there is no use staying in bed and the sun is already high at 6am in the summer months, we decided to take a morning walk and stumbled on McDonalds just five minutes away by foot. The cool but nice weather, cloudy sky, and canal on the city center remined us both to a city 5.200 Km away – Zurich. When we tried to buy our McMuffin we found that the store was closed but the drive-through is open, so we waited in line between cars and then walked across the street to the “Birthplace of Canada” landmark and have our breakfast there facing the canal. After a short walk alongside the canal we were back in our hotel and showered, ready to begin our short drive to Perce, a small coastal town that becomes the highlight of our trip.

Foggy Weather in Perce
Rocher Perce Behind the Fog

Pro Tips: you might want to fill your gas full tank in Gaspe, since there are only limited options for higher octane gasoline nearby Perce.

The weather in Perce was extremely foggy and windy when we arrived, which leaves us with few options but to go from stores to stores. One thing that surprises us is how touristy the place feels. The town has only one main road and on the left and right side is full of either restaurants, souvenir shops, or hotels. We parked our car on a large parking lot belonging to the Geopark building and headed to the pier to only see the famous Rocher Perce covered in fog, passing a very nice restaurant named Maison du Pecheur where we have our lunch after and wait for the foggy weather to pass. I would recommend trying their seafood chowder while in town.

Maison du Pecheur, Perce

Unfortunately, the fog proved to be stickier than anticipated, hence our decision to go to our hotel – Hotel La Cote Surprise – and rest. The next four hours was spent on unpacking our luggage, taking shower, and enjoying the ocean view from our balcony. Once the sun sets, we went back to town and bought some meal and wine to enjoy for the night. It is truly a day to remember.

Sunset in Perce From Our Hotel’s Balcony
Flying My Drone During the Sunset in Perce

Day 5 : Exploring Perce, Hiking, and Kayaking in Mal Baie

Our plan for the day was to catch the sunrise, go back to sleep, and explore the city before our appointment for sea kayaking later in the afternoon. In short, it is going to be a long day for us. Our alarm woke us at 3.45 am. Fogs were covering the waves, but we could hear water crashing against rocks from below. As the fog is gradually blown away by the morning breeze, birds are flying towards the bushes in front of our balcony. Once the sun rises high enough, we made a cup of tea for ourselves and played with our phones.

Sunrise in Perce, Ile Bonaventure on the Right Side

At 9 am sharp, we were already in the front door of Geopark building alongside other early birds to hike Mont Sainte-Anne and see the suspended glass platform ($15/person). The day before, we learned that there is a shuttle bus to go to the top and due to our time constraint we took that option, costing us our dignity and an extra $6 per person. The platform allows us to see the whole town, Rocher Perce, and Ile Bonaventure from higher perspective. The windless and sunny weather is also supportive for me to fly my drone and make some nice footage. To salvage some of our hurt ego, we decided to walk down the hiking trail instead of taking the shuttle back to town.

Suspended Platform at Mont Sainte-Anne, Perce
Rocher Perce from Mont Sainte-Anne

Another restaurant we recommend visiting in Perce is Buvette Therese, located in front of Maison du Pecheur where we ate yesterday. The restaurant has a big-city vibe indoor, and a large terrace facing green lawn. My girlfriend had a tasty duck-confit omelette for brunch while I had a smoked salmon omelette, both priced similarly to in Montreal.

Our appointment for sea kayaking is at 2pm, but we have to drive 30 minutes back to Gaspe direction to reach the rendezvous point. We use a guide from Avolo Plein Air for the excursion, and she did a wonderful job educating and navigating us through the whole period. Since we never did a sea kayaking before and only few times experience kayaking in Montreal’s Iles de Boucherville, we were quite surprised when asked to wear a whole diving suit alongside the shoes. After one and a half hour on the sea, four out of eight participants (including me and my girlfriend) were feeling seasick and dizzy, probably due to the heat and waves, so we took a break at a beach near St. Pierre for about 15 minutes.

Sea Kayaking Near Perce

On our way paddling back to the starting point we saw a seal and couple of whales from about 50 meters distance. It was a cool experience to have, despite being seasick. We were somehow relieved once we touched the ground – and feeling somewhat smelly from top to bottom. My running shoes that I wore were so damp and smelly that I ended up throwing it away after.

Although we were desperate to take a shower and hungry, we first have to drive for 30 minutes to Gaspe to fill our gas before heading back. There we bought some fries and chicken nuggets from McDonalds for our drive back to Perce. We took a very long shower and cleanse ourselves multiple times in the hotel, then with a tired and sleepy eye we went back to Buvette Therese to have our dinner and crashed on the bed after.

Day 6: Perce – Matane

Today is another long-drive day for us, with 350 Km distance from Perce to Matane that took around five hours fully on the road. Instead of going through Carleton sur Mer, we decided to use the same coastal route that we took on the way to Perce on Highway 132 to enjoy the ocean scenery. Although we are aware of our recent high junk food intake, we could not pass the opportunity to have another McMuffin breakfast with a view in Gaspe on our way. My girlfriend also sent a postcard to her friend in U.S.

And for lunch in Matane, believe it or not, we have KFC. Yes, Kentucky Fried Chicken, because I have been craving for it since our departure from Montreal. We passed the opportunity first on our way from Quebec City, second in Rimouski, and I do not want to miss this one again. In Montreal, KFC is not available in downtown, and I have to take 20 minutes trip with metro to buy one.

On the Road Back to Matane, Highway 132
We Saw Plenty of Caravan Along the Way, Perce-Matane

It was around 3pm when we are done with our meal. Four days ago, on our visit to Jardin Metis we missed the Festival International du Jardin, so my girlfriend wanted to go back. I relented since we have nothing better to do anyway in the city. Surprisingly, we saw new exhibitions, and even some still being built! We even went back to the café and ate a wild strawberry popsicle to close our visit.

Festival International du Jardin, Jardin Metis
Festival International du Jardin, Jardin Metis

We stayed at Riotel Matane for the night, expecting they would have a table for us at the hotel’s Restaurant Cargo, and since the city does not seem to be too touristy, we did not book for one. Again, for the third time, we regretted not booking restaurant in advance. The hotel’s receptionist recommends us to go to La Fabrique – another well-rated restaurants 5 minutes drive away. Apparently, he has been dispensing the same recommendation to other guests, which we saw while waiting for our table. We had a pint of beer each, pork ribs, and poutine.

That day in Matane, we saw the most colorful sunset from the beach on the back of our hotel’s room. I flew my drone while my girlfriend is making a timelapse with her GoPro, before heading back to our room and prepare for an early rise the next day.

Sunset in Matane

Day 7: Crossing Saint Laurent River – Whale Watching in Tadoussac

Having been on the Eastern side of Saint Lawrence River for the past six days, today we are crossing to the Western side of the river by a ferry. STQ, a government-run transport company offers two and a half hours cruise from Matane to Baie Comeau, departing at 8 am sharp. If you are planning to take this ferry, it is highly recommended to book in advance, since they could not guarantee a space is available during peak season.

We arrived around 7.20am at the port and waited in line inside our car to get into the ferry. There are two levels of vehicles deck inside, the lower one for large truck and commercial vehicles, and the higher one for passenger vehicles. Once we parked our car, we were routed to a stair that leads to the ticket booth and passenger area. My first impression going around is that the ship is big! There is plenty of seating space across the main deck, and there is also a section for kids playing room and a restaurant. Taking a stair to the upper level brings us to the open-space area where one could smoke or simply get some air.

Passenger Space Inside the Ferry, Matane-Baie Comeau

We were in a bit of rush in the morning to avoid being late for the ferry, so we have not had our breakfast and decided to try the restaurant’s breakfast menu – toasts, potato, eggs, and bacon. The food is okay but is priced on the higher price range for such meal. There is free wi-fi available during the crossing, but I found the internet access only works 20-30 minutes after departure and before arrival, while my phone’s signal is also out of service in the middle of the crossing. Most of the time, I was reading my book and catching up with emails.

The drive from Baie Comeau to Tadoussac took around slightly over two hours, which allows us to arrive early in the city before our excursion at 4pm. After finding a parking across Café l’Abri Côtier, we went inside and had a small cake each. Since it was raining, there is not much we could do but to visit one of the souvenir shops.

For some unknown reasons, we were confusing the meeting point for the whale watching excursion, which forces us to run from one place to another to avoid being left by the group. But eventually, we made it to the spot and were given set of outer layer clothing to wear while other guests are getting ready as well. Due to the rainy and poor weather condition, the whale watching experience was not a pleasant one for both of us. We were all so wet – especially the shoes – and cold that the only thing we want is to go back and be somewhere warm. Fortunately, we saw the three or four whales from about 10-20 meters distance.

Whale Watching Excursion in Tadoussac
My Girlfriend All Wet and Unhappy With the Weather

Our hotel for the night is located on the other side of Saguenay River, which requires us to take another 10 minutes (free) ferry to cross. Luckily, there is a small restaurant on our hotel, so we do not need to drive around to find our dinner before going to sleep.

Pro Tips: many of the restaurants are closed at 9 pm in Tadoussac, an earlier booking is suggested.

Day 8: Tadoussac – Quebec City

After a week in travelling on the coastal side of Quebec, we were happy that today we are going back to a city. Due to lack of attractions in the Baie Saint Catherine, we packed up early and drove for three hours to Quebec City, aiming to arrive there around noon to have our lunch.

Going back to a city also means facing the regular problem of trying to find a parking spot. Our hotel, Manoir Morgan, which is in the old town area does not have one, so we took a $20/day option for few minutes walk away under Hotel de Ville. At this point, I was literally walking around in a slipper, as my shoes are all wet from yesterday’s whale watching. So before heading to Restaurant Portofino on the lower plane of the town, we headed to a shoe store next to Simons and I bought a pair of running shoes.

Our lunch at Portofino was fantastic, as usual. We stumbled on this restaurant two years ago, early in our relationship, and rate it highly in our list. This time, we tried their pasta with duck confit and found the taste to be heavenly and the portion generous. I have a feeling that we will visit the restaurant every time we are in the city.

Rue du Petit Champlain, Quebec City

After the meal, we walked down to Rue du Petit Champlain to do our shopping. I bought another flat cap at the same store where I bought one years ago. Next, we visited several antique shops (one of our hobby in Montreal) and my eyes caught on a vintage Omega watch, which I eventually bought for decent price.

We took a rest at our hotel’s room after walking for few hours around the city. Our dinner was at 9pm at Chez Boulay, an upscale French bistro we also ate in two years ago. Both of us were tired after the meal, so we decided to head back and sleep after.

Day 9: Quebec City – Montreal

We naturally woke up around 7am today. Instead of sleeping through the morning on our last day, we went for a walk and have our breakfast at Paillard, a local bakery with decent choice of pastries. Today is our museum day. My girlfriend has been eyeing for a limited-period exhibition of Picasso’s painting that is exclusive in Quebec City’s Musée National des Beaux-arts. We dined on the café inside the museum after and continued venturing to the regular exhibition building of the museum.

At around 3pm we started driving to Montreal, thinking of what we would eat for dinner (Chinese food) and things to do on the weekend (washing our clothes and car). It has been a joyful 9-day vacation for us and although we did not go outside Quebec, it sure feels like another world!

Musee des Beaux-arts, Quebec City
Musee des Beaux-arts, Quebec City
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Six Years After: A Personal Reflection

Random thoughts on a Friday night, to those who are lost and full of doubts.

Today is a special day for me. If I remember correctly, today marks the 6th year anniversary since I officially quit medical school, an event that not only impact the perspective I have on myself, but also alter the trajectory of my career, relationship, and life path in general.

I still vividly remember the feeling of being an outcast – somebody who does not belong – after handing out my resignation letter to the program director and walk out for the last time from the hospital I’ve been breathing in almost everyday for the past 4 months or so. It was an expression of guilt (for wasting my parents’ money on the relatively expensive medical school), failure (of pushing myself to follow the program after 4 years study), and shame (peer pressure was more intense when you are younger).

Now thinking back, from time to time, I wondered if my decision back then was the correct one, whether I should have finish my study to get my doctor title – as many rational others advocated me – or simply dropped out as I did.

I wished I could see a parallel universe where I did the former, and still come up well. But of course, no such thing exist and for the first few years I had been living in a state of anxiety, afraid of whatever I do next is going to be a mistake. Eventually the feeling numb out and I got carried away with my routine and forgot the issue.


Yesterday morning, I woke up from the warmth of the sun shining inside my bedroom with its ray on my feet. It was a wonderful summer here in Montreal and despite the city going bustling back from the pandemic, there is a quiet and peaceful moment that day.

As usual , I checked my phone for important emails and made myself a large jug of english breakfast tea, before grabbing one chocolatine I bought days before. My boss sent me some jokes via email, which we had been trading the night prior.

I’m excited to start the day, working on a project I have been assigned on before. As a recently promoted analyst, I have to continue deliver to move ahead in the firm. But mind you, I love the work I do now, and even excited to do it as it could translate to monetary benefit for myself.

Life is good. My family is relatively healthy and economically secure. I’m earning well to support my lifestyle, and I have a decent relationship with my girlfriend and few other close friends.


When you are hiking, often times there is multiple paths you could take to reach the top. There is a short path with a steep elevation, there is longer path with easier hike, and there is also a long path that goes around the mountain before resuming to the path that actually lead to the peak, which is your destination.

Sometimes I like to think myself taking the later. It could be categorized as a time-wasting and unnecessarily long hike. From a matter of efficiency, this is definitely not the best way to reach the peak, but sometimes it route us to beautiful landscapes along the way and taught certain skills that we may need later on. More importantly, when we are hiking, is it really reaching the destination that is so important, or the experience along the way? Do we not eat delicious food for the pleasure of the tongue rather than the stomach?


My life was not always this easy. Learning something completely new could be a difficult and stressful endeavour, although having a passion in the subject could really helps.

In the three years after quitting medical school (June 2015 – June 2018), I have been busy like a mad man. During the period, I finished two Masters degree (one in local uni and one in top global uni), passed 3 levels of CFA exams, 2 levels of FRM exams, immigrate to Canada (passing B2 level of French exam), and found a permanent job there.

If there is anything I’m thankful (and proud) for myself, that is having resilience – some of my colleagues and friends who have Bachelor degree in finance told me I have robot-like discipline – and clear goals in life. And guess where I got those traits? You are right, medical school, where most students are forced to cram impossible amount of materials in short period of time, which force you to maintain some sort of inhuman level of absorbing knowledge and thinking it through in medical cases.

I also think that having your personal goals aligned with whatever you are doing is important to excel in life. It is as if we are sailing with a tailwind instead of trying to find an excuse for ourselves.


Life does not always go according to what we want. Sometimes we are lost, but more surprisingly many people actually does not know where they want to go (talking in terms of life goals and career interest). I was lost, but now I am not and in between I tried to benefit from the tailwind to go faster.

I had arrived in the first checkpoint. That was three years ago. Last month, I passed the second one. In the meanwhile, I’ll continue sailing to my next one while purportedly deviating from the path from time to time.


Two parting quotes to end the piece. Many MBA graduates would agree with this:

You can’t connect the dots looking forward; you can only connect them looking backwards. So you have to trust that the dots will somehow connect in your future. You have to trust in something — your gut, destiny, life, karma, whatever. – Steve Jobs

And the second is from one of my favourite song, “My Way”, which most of you must have known:

But through it all, when there was doubt

I ate it up and spit it out

I faced it all and I stood tall and did it my way

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Key Points from Book: The Price of Peace


by Zachary D. Carter

Published in December 1923, A Tract on Monetary Reform was, like its predecessor, a deceptively technical title filled with shocking ideas.19 It was not merely the sanctity of international debt contracts that must be abandoned, Keynes informed his readers, but the entire global financial system that had established the foundation of free exchange between nations. The gold standard, the benchmark of economic sanity for as long as anyone could remember, had become a barrier to peace and prosperity—a “barbarous relic” incompatible with “the spirit and the requirements of the age.”20 One by one, Keynes was taking aim at the sacred tenets of nineteenth-century capitalism. The world was about to change.

The new financial reality had spawned its own political ideology. In 1910, the British journalist Norman Angell published The Great Illusion, a book claiming to demonstrate that the international commercial entanglements of the twentieth century had made war economically irrational. No nation, Angell argued, could profit by subjugating another through military conquest. Even the victors would suffer financial harm, whatever the spoils might be.

The more currency a country circulated, the more economic activity it could support—so long as there was a corresponding amount of gold stored away in bank vaults to back up its bills. The financial thinkers of the day believed that without gold to give money some value independent of a government’s say-so, issuing fresh currency could not ultimately boost the economy. Instead, it would cause inflation, an overall increase in prices that would devalue the savings people had previously accumulated and eat away at the purchasing power of their paychecks.

The experience left a deep impression on Keynes. Financial markets, he had discovered, were very different from the clean, ordered entities economists presented in textbooks. The fluctuations of market prices did not express the accumulated wisdom of rational actors pursuing their own self-interest but the judgments of flawed men attempting to navigate an uncertain future. Market stability depended not so much on supply and demand finding an equilibrium as it did on political power maintaining order, legitimacy, and confidence. Twenty-two years later, those observations would become central tenets of the economic theory presented in Keynes’ magnum opus, The General Theory of Employment, Interest and Money: A large proportion of our positive activities depend on spontaneous optimism rather than on a mathematical expectation, whether moral or hedonistic or economic. Most, probably, of our decisions to do something positive…can only be taken as a result of animal spirits—of a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities. Enterprise only pretends itself to be mainly actuated by the statements in its own prospectus….Only a little more than an expedition to the South Pole, is it based on an exact calculation of benefits to come. Thus if the animal spirits are dimmed and the spontaneous optimism falters, leaving us to depend on nothing but a mathematical expectation, enterprise will fade and die;—though fears of loss may have a basis no more reasonable than hope of profit had before.

Markets, Keynes concluded, were social, not mathematical, phenomena. Their study—economics—was not a hard science bound by iron laws, like physics, but a flexible field of custom, rule of thumb, and adjustment, like politics. Market signals—the price of a good or the interest rate on a security—were not a reliable guide to consumer preferences or corporate risks in the real world. At best, they were approximations, always subject to change based on new attitudes about an uncertain future.

Principia Ethica was a sophisticated attack on the moral and political philosophy that had dominated English thought since the late eighteenth century—a doctrine that went by the name “utilitarianism.” Developed by Jeremy Bentham and John Stuart Mill, utilitarianism declared that pleasure was the basis of all morality. A good or right action would produce pleasure. The more pleasure a good deed produced for the more people, the more righteous it was. And so the aim of all government was to produce more pleasure. The best society was the happiest society.

Moore and the Apostles hoped to overturn utilitarianism without reverting back to the moral authority of the Church, which was quickly falling out of fashion in English culture. Things were not good because they produced pleasure, Moore argued. They were good because they were good. Pleasure itself could be either good or bad. People enjoyed all kinds of terrible things, and the pleasure they derived from them was not good but perverse. A good horse, a good piece of music, and a good person, meanwhile, all had something ineffable but vitally important in common: they were all good. But you could not find this goodness under a microscope. It could not be measured or derived from some set of facts about the natural world; it was a fundamental property, “simple, indefinable, unanalysable,”18 that could only be intuited directly by human reason. There were objective facts about value just as there were facts about colors; it wasn’t a matter of opinion whether the sky was blue or Goethe was a great poet. But good things could be understood solely in their “organic unity”; they could not be intellectually broken up into smaller components.

Utilitarianism and classical economics had developed alongside each other in English-language thought and shared important conceptual foundations. Both were concerned with efficiency. Economists following Adam Smith focused on the efficiency of agricultural and industrial production; utilitarian philosophers mused about the efficient production of pleasure. Both utilitarianism and the economics discipline were oriented around simple mathematical conceptual schemes: more was better and getting more with less better still. But after reading Principia Ethica, Keynes rejected the idea that efficiency could be the central organizing principle of a good society. No simple equation could approximate the best way to live.

He supported modest expansions of British social welfare programs, but his speeches to the Union from 1903 reflect a preoccupation with the Church—which he considered a source of sexual and intellectual tyranny—and unfettered trade. “I hate all priests and protectionists,” he declared in December 1903. “Free trade and free thought! Down with pontiffs and tariffs. Down with those who declare we are dumped and damned. Away with all schemes of redemption or retaliation!”

Tariffs projected a “Spirit of Nationalism,” which was “one of the most considerable hindrances to the progress of Civilisation”—“a feeling that anyone else’s prosperity is your damage, a feeling of jealousy, of hatred.”

Under traditional economic theory, markets were supposed to clear these problems by themselves. Prices would rise and fall according to supply and demand, encouraging goods to flow to where they were most needed. A country that produced too much iron could trade it to a country that produced too much wheat and vice versa. Keynes didn’t dispute the idea in principle, but he and other Allied policy makers recognized that battalions could run out of ammunition and cities could starve while everyone waited for markets to adjust. Free markets were a luxury that a nation at war could not afford.

Economists had long been aware that inflation was a common problem during wartime. When cash-strapped governments printed money to pay their bills, prices rose, reflecting, according to the theory, the higher quantity of money in circulation. In a nationally self-sufficient economy like that of Germany, Keynes argued, inflation functioned as “a concealed tax.” Wages couldn’t increase evenly with the prices of goods, because the German government had frozen workers’ pay rates for the duration of the war. So although the German people were taking home the same paychecks they had received in 1913, those paychecks didn’t have the same purchasing power they had once carried. Printing notes gave governments more money to spend on the war as it reduced the standard of living for the citizenry—transferring wealth from the public to the government, just as taxation might have done. That system might be attacked on grounds of “social justice”—why, after all, were “the working classes” being required to pay for the war instead of the very rich?—but there was no risk in Germany that inflation would lead to a runaway disaster during the war. When the German government stopped printing extra currency to pay its military bills, the price increases would stop.

But inflation would function much differently in the British economy. Because Britain relied so heavily on international trade, Keynes argued, inflation could serve only as a very temporary expedient. When British prices increased, it affected not only household budgets but also the prices the British paid for imports. At the same time, the prices British producers received for their exports did not increase; the amount they could fetch in foreign markets depended on the prevailing market prices abroad, not on the going rate at home. As a result, inflation had the effect of exacerbating the British trade deficit—the British were paying more to consume goods from abroad than they received from the sale of exports. And since foreign suppliers wanted to be paid in either foreign currency or gold, the British could inflate themselves into bankruptcy. A sustained trade deficit would deplete Great Britain’s gold reserves.

This was an important theoretical point in Keynes’ intellectual development. Money wasn’t just a passive force that people used to keep track of the value of goods and services; it was an active power in its own right. A problem in the monetary system could create unexpected trouble in the realm of what Keynes called “real resources”—the equipment, commercial products, and savings of a community.

Keynes and McKenna believed that the strongest weapon in the British arsenal was its economy. Great Britain was the richest nation in the conflict, providing money to Russia, France, Italy, and everyone else on the Allied side. The ultimate source of wealth in this war chest was the country’s formidable industrial sector, fueled by the resources of its vast global empire and its dominating navy. If Britain was to support its own soldiers, much less the entire Allied project, it would also need men on the home front running machines, harvesting fields, and performing essential economic work. A surge of troops would deplete essential manpower at home. It was a matter of both production and payment. The British needed men in factories to manufacture the weapons used on the front lines. But they also needed men to produce exports that could be sold abroad, particularly in the United States. When the British bought supplies from America, their U.S. trading partners had to be paid in dollars. And the most reliable way for the British to get dollars was to sell products to Americans. The government could sell off imperial assets for dollars—stocks, bonds, royal treasure—but a fire sale during wartime would probably yield disappointing prices and would permanently reduce the wealth of the empire.

And as with the financial crisis of August 1914, Keynes believed the question of money had become a question of power. Much of the British Empire’s economic might over the previous half century had been derived from its status as a creditor nation. When other countries needed funds, they turned to London, which gave the British a unique ability to influence how that money was spent and whom it would benefit. But the war had forced Great Britain to look abroad for its own financing needs, and Keynes recognized that as the empire became increasingly dependent on foreign help, it ceded geopolitical influence.

Even before hostilities had formally ended, the Treasury had asked Keynes to calculate precisely the amount Germany could afford to pay. Keynes identified a maximum of £2 billion—half paid up front, the other half spread out over the next three decades.21 The actual costs of the war, of course, had been vastly higher, but a more exacting indemnity would prove counterproductive. To generate the wealth needed to make reparation payments, Germany would have to boost its exports, taking international market share from British producers and thus ultimately undercutting British wealth. If the Allies tried instead to seize German gold, German mines, or German factories, they would only undermine Germany’s ability to generate future wealth that could be devoted to tribute. “If Germany is to be milked,” Keynes wrote in a report for the British delegation, “she must not first of all be ruined.”

Like everyone else at Paris, Wilson blamed Germany for the war. Unlike many, however, he did not blame the German people. Indeed, to Wilson’s mind, German citizens had been victims of the kaiser’s autocratic excess before the peoples of Belgium, France, Russia, and Great Britain had been, as he told Congress in April 1917: “We have no quarrel with the German people. We have no feeling towards them but one of sympathy and friendship. It was not upon their impulse that their Government acted in entering this war. It was not with their previous knowledge or approval. It was a war determined upon as wars used to be determined upon in the old, unhappy days when peoples were nowhere consulted by their rulers and wars were provoked and waged in the interest of dynasties or of little groups of ambitious men who were accustomed to use their fellow men as pawns and tools.”27 In short, he believed that the war had been caused by autocracy—an idea bound up inexorably with empire, since conquered peoples were denied their own government. Its solution was democracy—and by implication, the end of imperialism. “A steadfast concert for peace can never be maintained except by a partnership of democratic nations. No autocratic government could be trusted to keep faith within it or observe its covenants….Only free peoples can hold their purpose and their honour steady to a common end and prefer the interests of mankind to any narrow interest of their own.”

The war debts of Allies and enemies alike were so massive that they would be stirring up social turmoil for years to come. Governments would have to curb services to their citizens in order to meet foreign interest payments. Taxes would need to be raised in order to ship money overseas. The notion that this was a fair return for America’s help in the war might resonate with financiers and government officials, but it would make little sense to citizens. A farmer who had lost his son and half his acreage would not feel a rush of gratitude at the prospect of diverting a huge portion of his labor to the enrichment of American bankers.

His battle over reparations and inter-ally debt had made him a lifelong enemy of austerity—the doctrine that governments can best heal troubled economies by slashing government spending and paying down debt. When a government was burdened with too much debt, Keynes had come to believe, it was generally better to swear off the debt than to pay it off by burdening the public with a lower standard of living.

The product of his labors, Economic Consequences, still stands today as both a landmark of political theory and one of the most emotionally compelling works of economic literature ever written. Like all of Keynes’ best work, it is not fundamentally a work of economics at all, but a treatment of the great political problem of the twentieth century—a furious tirade against autocracy, war, and weak politicians. It is at once a howl of rage directed against the most powerful men in the world and an ominous prophecy of the violence that would again sweep the continent in the years to come. The book opens with a sunny portrait of the global financial order that persisted between the close of the Franco-Prussian War and the summer of 1914, describing the free international trade system as an engine of prosperity unparalleled in human history. Economic inequality had been the essential ingredient of that social progress, creating large personal fortunes that the rich could invest in new enterprises that addressed society’s needs and advanced the progress of “civilisation.” Though the mechanisms of growth were inherently unfair, with capitalists at the top reaping far more economic fruit than workers at the bottom, the gains improved the lives of all who participated: better food, nicer fineries, all the extravagances of La Belle Époque that could be purchased at ever-declining prices by an ever-expanding middle class. “Society was working not for the small pleasures of to-day but for the future security and improvement of the race,—in fact for

The steady piling up of material riches over the decades had created the impression of a strong and resilient system. But Keynes believed the arrangement was a fragile historical anomaly. It depended on “a double bluff or deception”: the system would only work if workers believed in it, and workers would not believe in it unless it worked. Break the collective faith in a better tomorrow, and workers would walk off the job, riot in protest, or worse.

One of the great rhetorical tricks of Economic Consequences is the ease with which Keynes moves from images of “terrible exhaustion” in Austria and Germany to the prospect of continent-wide economic crisis. The “oppressive interest payments to England and America” still on the books would soon reduce France, Italy, and Belgium to the same condition as Germany. The economic fate of Europe, Keynes insisted, was already indivisible, and that economic union would write its political future. Governments burdened with heavy debts, Keynes predicted, would resort to inflation to ease the burden, just as they had during the war—a situation that would quickly prove politically destabilizing. Inflation had unequal effects. People with substantial savings—a small minority of the population in 1919—were hit hardest, as the value of their nest egg was eroded; it was a “hidden tax” on a particular economic demographic. Such a morally arbitrary “rearrangement of riches” would fuel anger at the “capitalist classes.” “Lenin was certainly right,” Keynes wrote. “There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency.”18 (Though this has become one of the Marxist leader’s most popular aphorisms over the years, the prose is pure Keynes; he was paraphrasing an interview Lenin had given to a New York newspaper.)

He agreed with Burke that governments were justified not by inalienable individual rights but by their results—their ability to achieve social stability and public happiness—and he shared with his predecessor a profound fear of social upheaval. But though he agreed with Burke’s aims and his mode of analysis, he rejected many of his methods. Burke, like the population theorist Thomas Malthus, had seen economic scarcity as an inescapable fact of human life. There just wasn’t enough wealth to go around, and if humanity was to realize any abiding cultural achievements, mitigating inequality could not be a function of government. Democracy, to Burke, would lead to collective poverty and the end of all fine living. A monarchy that protected the rights of private property was the only way to secure a decent society.

The warnings Keynes issued in the pages of The Economic Consequences of the Peace would reverberate through European history as militant demagogues rose across Europe, exploiting inequality, austerity budgeting, inflation, and uncertainty to take power by preaching vengeance and hate. Benito Mussolini would march on Rome in three years’ time. In Germany, hyperinflation and Adolf Hitler’s Beer Hall Putsch would follow soon after, the rise of Josef Stalin a short time after that. Keynes’ slim masterpiece remains essential today not because of its statistical prowess or its analytical detail but because the mass psychology he presented would prove so integral to the great tragedies of the twentieth century. And the explanatory power of his narrative can be applied with only modest revisions to the great problems of the twenty-first century. Substitute the financial crisis of 2008 for the Great War, swap European austerity budgets and the American foreclosure crisis for war debts and reparations, and the result is a modern recipe for militant far-right nationalism.

“The moderate people can do good and perhaps the extremist can also do good; but it is no use for a member of the latter class to pretend that he belongs to the former,” Keynes wrote to Arthur Salter, who had been secretary at the Supreme Economic Council in Paris. “Besides, it is much a hopeless business trying to calculate the psychological effect of one’s actions; and I have come to feel that the best thing in all the circumstances is to speak the truth as bluntly as one can.”

Keynes argued that there is a difference between probabilities and statistical frequencies. To say that some state of affairs is probable, according to Keynes, is not to simply state that mathematically, it will occur a certain percentage of times in a simulation (that is, if fifty of the one hundred coins in a bag are quarters, I have a 50 percent probability of drawing a quarter every time I reach in). Mathematical data might be useful in a person’s assessment of probability, but it cannot be probability itself.

That doctrine—that managing the overall supply of money was the best way for governments to achieve economic growth and stability—became known as monetarism. It was a radical rethinking of the way central banks should operate.63 The Bank of England typically managed its gold reserves with an eye to fluctuations in international trade, ensuring that Great Britain didn’t run out of gold due to too many imports or a shortage of exports. If Britain was running a trade deficit, then money—gold—would be flowing out of the country, because Britain was effectively purchasing more goods from abroad than it was selling to foreigners. In that situation, the Bank would raise interest rates, effectively lowering the price of British goods on the international market until trade levels were balanced. The idea was to have the real terms of trade determining the price level. Keynes was suggesting the opposite, regulating prices to ensure stability—a strategy that would have implications for the course of trade. It was a step away from the laissez-faire doctrine that public officials should not meddle in economic affairs. Governments would find themselves forced to choose between maintaining a stable exchange rate and a stable price level. When the choice came, Keynes argued, there should be no hesitation: Keep prices stable, and adjust exchange rates. It might be true that “over the long run,” rashes of inflation and deflation would burn themselves out. “But this long run is a misleading guide to current affairs,” Keynes observed. “In the long run, we are all dead.

There is an unresolved tension running throughout Keynes’ work between his desire to democratize the trappings of ruling-class life and his own reverence for that same ruling class. “The great trouble with Keynes was that he was an idealist,” his colleague and collaborator Joan Robinson once wrote.7 His faith that “an intelligent theory would prevail over a stupid one”8 was hard to square with a world in which “vested interests” often rejected reforms that carried broad benefits for all, preferring even a dysfunctional status quo as long as it maintained their place at the top of the social pecking order.

By the time he presented The End of Laissez-Faire to a lecture audience at Oxford in November 1924, British unemployment had been in double digits for nearly five consecutive years. Instead of creating equality and harmony, laissez-faire had generated vast inequality and social unrest, so much of each that all the splendid things liberal individualism was supposed to foster—fresh thinking, great art, fine wine, exciting conversation—were now threatened by social instability. It was time to move on.

“One of the most interesting and unnoticed developments of recent decades,” he wrote, “has been the tendency of big enterprise to socialise itself”19 by responding to public need rather than private profit.

“The political problem of mankind is to combine three things: economic efficiency, social justice, and individual liberty,” Keynes wrote.

Lower wages were in a very real sense the point of deflationary policy; the idea was to bring down the price of everything, including labor. Under classical economic theory, this cost cutting did not have to result in mass layoffs. “Unemployment is a problem of wages, not of work,” Keynes’ Austrian contemporary Ludwig von Mises wrote in 1927.50 As high interest rates imposed higher costs of credit on employers—or reduced demand for their goods—companies could reduce labor costs by cutting pay all around. Lower wages wouldn’t really hurt workers, the thinking went, because with the price of goods falling, workers wouldn’t need as much money as they had before. Based on this reasoning, Conservatives, bankers, and even Liberal politicians blamed the British jobs crisis on trade unions. People had to be laid off, these critics insisted, because companies had signed collective bargaining contracts that required them to keep wages artificially high. Since wages couldn’t be lowered, firms had no other choice but to fire people to bring down their costs. Firms that couldn’t fire people had to close. Keynes lampooned what he called the “orthodox” explanation: “Blame it on the working man for working too little and getting too much.”51 All of that might make sense on paper, Keynes argued, but it was totally divorced from what happened in the real world. “Deflation does not reduce wages ‘automatically,’ ” he observed in the Evening Standard. “It reduces them by causing unemployment.”52 Keynes had little enthusiasm for unions, but by 1925 he believed that steep deflation could never be accomplished without mass layoffs unless the government became deeply involved in managing the affairs of the business world. It was not only collective bargaining that stood in the way of uniform wage reductions; it was human psychology. No sane worker negotiating with his boss would accept a pay cut in the name of broader social welfare without some guarantee that other workers would take the same deal. He could easily find himself shortchanged for nothing. “Those who are attacked first are faced with a depression of their standard of life, because the cost of living will not fall until all the others have been successfully attacked too,” Keynes wrote. “Nor can the classes, which are first subjected to a reduction of money wages, be guaranteed that this will be compensated later by a corresponding fall in the cost of living, and will not accrue to the benefit of some other class. Therefore they are bound to resist so long as they can; and it must be a war, until those who are economically weakest are beaten to the ground.”53 Contrary to the conventional wisdom, then, it was not the departure from gold that was causing Great Britain’s economic malaise, it was the country’s enthusiasm to return to gold at the exchange rates that had prevailed before the war.

The collective faith of the citizenry in the ability of the nation’s economic system to deliver steady, predictable gains had collapsed. Millions of British workers had joined together in an attempt to shut down the entirety of the nation’s commercial life. People—most people—had actively harmed their own society in order to make a political point. The unrest had extended well beyond the ranks of the unemployed; only people who had jobs could go on strike, after all. There was clearly no sense among the public that their welfare rested on secure foundations. It was as if the “double bluff” of the prewar years had been reversed, creating a downward spiral of doubt and decay. People had once accepted an unequal system because it had improved their lives; because they had embraced it, the system had been able to generate prosperity. Now everyone from the coal miner to the investment house magnate had come to believe in a bleak, limited future (whatever the bankers said about the virtues of the gold standard, the paucity of actual investment in the economy was a more telling measure of their true feelings). That collective doom and gloom could not be broken by individual acts of courage.

Money, he argued, was an inherently political tool. It was the state that determined what substance—gold, paper, whatever—actually counted as money—what “thing” people and the government would accept as valid payment. The state thus created money and had always regulated its value. “This right is claimed by all modern states and has been so claimed for some four thousand years at least.”45 The significance of gold to economic history was both relatively recent—it had only really mattered in the past few decades—and arbitrary. The true source of monetary stability was the public legitimacy of the political authority that happened to choose gold as its preferred medium of exchange. Money had no meaning absent political authority.

The Treatise, then, was an all-out assault on the intellectual foundations of laissez-faire. There was no such thing as a free market devoid of government interference. The very idea of capitalism required active state economic management—the regulation of money and debt.

Ideally, according to Keynes, the savings of the people would equal the investments of the business world. But things could go haywire; there was no process by which savings were automatically converted into investment. The impetus to save and the impetus to build were different motivations. “It has been usual to think of the accumulated wealth of the world as having been painfully built up out of that voluntary abstinence of individuals from the immediate enjoyment of consumption which we call thrift,” he wrote in the Treatise. “But it should be obvious that mere abstinence is not enough by itself to build cities….It is enterprise which builds and improves the world’s possessions….If enterprise is afoot, wealth accumulates whatever may be happening to thrift.”54 The role of the banking system was to ensure that the savings of society were perfectly tuned to society’s capacity for investment. If the interest rates lenders offered were set correctly, savings would equal investment and society would operate happily at full employment. But if total investment exceeded the total amount that a society wanted to save, the result would be inflation. And if the reverse occurred—if a society saved more than it invested—the result would be a “slump.”

Keynes and Marx also shared the unfortunate fate of being right about the revolutions to come and wrong about their social implications. As Marx predicted, Communists overthrew capitalists all over the world in the twentieth century. Keynes, for his part, got his math about right. If anything, he was overly pessimistic about the economic potential about to be unleashed. By 2008, the Nobel laureate economist Joseph Stiglitz has noted, global economic output reached a level sufficient to raise every man, woman, and child on the face of the earth above the U.S. poverty line—a very great improvement for the domestic poor and an astounding achievement for the global poor.81 According to a recent analysis by Harvard University economist Benjamin M. Friedman, we are, moreover, on track for an eightfold increase in the standard of living in the United States by 2029—if standard of living is taken to mean the total economic output per person.82 “The numbers hang together,” observed another Nobel laureate, Robert Solow83—even though the world did not, in fact, escape several catastrophic wars in the decades since Keynes’ essay. But the age of farmer-critic-fishermen is not yet upon us. We do not live in a utopia where all people work fifteen hours a week, reserving the rest of their time for painting, literature, and walks in the park. What went wrong? In his essay, Keynes distinguished between human needs essential to survival and semi-needs whose “satisfaction lifts us above, makes us feel superior to, our fellows. Needs of the second class, those which satisfy the desire for superiority, may indeed be insatiable.”84 This effort to keep up with the Joneses has no doubt played a role in lengthening the workweek. But the primary culprit is simple inequality. The tremendous expansion of output and productivity over the past ninety years has been harvested for the most part by a very small section of society. For everyone else, economic prospects are roughly where they were in the mid-1920s (although a decline in the overall workweek from 1930 to 1970 suggests very clearly that people are not really eager to work the hours they do). As any working family can attest, they work because they have to.

Both tariffs and monetary adjustments were efforts to alter the flow of trade, thus expanding domestic production and employment. One functioned by changing the price of goods, the other by changing the price of money, but the effect was the same.

Free trade, Ricardo had explained, allowed countries to specialize in what they did best, enabling the world economy to produce more than if each individual country tried to supply itself with homegrown goods. But technology had eliminated many of the advantages of national specialization. International trade was dominated by heavy manufacturing products that could now be made for the same price just about anywhere.

“The class-war faction believe that it is well known what ought to be done; that we are divided between the poor and good who would like to do it, and the rich and wicked who, for reasons of self-interest, wish to prevent it; that the wicked have power; and that a revolution is required to depose them from their seats. I view the matter otherwise. I think it extremely difficult to know what ought to be done, and extremely difficult for those who know (or think they know) to persuade others that they are right—though theories, which are difficult and obscure when they are new and undigested, grow easier by the mere passage of time.” Compared to the persuasive power of good ideas, he insisted, “the power of self-interested capitalists to stand in their way is negligible.”

FDR had a remarkable capacity to show different faces of his political persona to different audiences when it suited him, and his rhetoric didn’t always match his policy agenda. But over the coming years, he would show that he meant what he said on his first day in office. The abandonment of laissez-faire in banking didn’t happen all at once, but it proved to be extremely thorough. Roosevelt would leave the gold standard, socialize the deposit system, nationalize the Federal Reserve System, synchronize monetary policy with fiscal policy by placing the Fed under Treasury oversight, and force the nation’s biggest banks to break up into smaller institutions with narrower lines of business. In sum, he broke the political back of the American financial sector and began using it as an instrument of economic recovery, directed by the federal government. It would prove a triumph of Keynesian policy more comprehensive than Keynes had ever imagined possible in the United States—a fundamental change in the relationship among the state, society, and money.

During the Great Depression, more than half of the country’s population still lived on farms or in the small towns that served as local hubs for agricultural trade (today, about 80 percent of Americans live in cities). And a staggering one-half of all farm loans were in default when FDR came into office.38 The crushing deflation of the Depression had done what it always did to farmers: Though the prices for their produce fell, the loan balances farmers had taken on to seed and harvest their fields remained high. When farmers were forced to sell their crops for less, their debts became overwhelming. FDR established an array of programs to get farmers more attractive loans. But lower rates on mortgages could help only at the margins if the president couldn’t stop the relentless decline of commodity prices. In the summer of 1933, he dispatched his economic adviser, George Warren, to Europe to survey monetary strategies abroad. Warren returned with a grim political assessment. “Hitler is a product of deflation,” he wrote to Roosevelt. “It seems to be a choice between a rise in prices or a rise in dictators.”39 Events at home, meanwhile, had already convinced Roosevelt of the need to take drastic measures. Three weeks after the president had ordered citizens to turn over their gold coins, Judge Charles C. Bradley had taken up a slate of foreclosure cases in Le Mars, Iowa. A total of fifteen farms were at risk of being repossessed when 250 angry farmers descended on Bradley’s courtroom and demanded that he impose a countywide moratorium on foreclosures. The agitators stormed the bench, threw a rope around Bradley’s neck, and dragged him to a country crossroads, where they “nearly lynched him.”40 Roosevelt had prevented a financial collapse on inauguration day, but rural America remained on the verge of revolution. With half of the country living off the land, somewhat higher grocery bills resulting from higher crop prices would have been worth the sacrifice. But Roosevelt decided to bring crop prices up primarily by bringing the value of the dollar down. If it worked, the price of everything, including wages, would effectively go up, easing the effect of higher food costs on household budgets. “It is simply inevitable that we must inflate,” FDR wrote to Woodrow Wilson’s old aide, Colonel Edward M. House. “Though my banker friends may be horrified.”

The government, he argued, should act directly to expand economic “output” and consumer “purchasing power” through deficit-financed expansion. Whatever else FDR might do in office, the fundamental imperative was to spend, spend, spend: “I lay overwhelming emphasis on the increase of national purchasing power resulting from governmental expenditure which is financed by loans and is not merely a transfer through taxation, from existing incomes. Nothing else counts in comparison with this.”

Cheap credit and an expanded money supply were not enough. The government would have to actually spend that new money it created in order to get the economy moving again. Relying on monetary policy alone, Keynes argued, was “like trying to get fat by buying a larger belt. In the United States today your belt is plenty big enough for your belly. It is a most misleading thing to stress the quantity of money, which is only a limiting factor, rather than the volume of expenditure, which is the operative factor.”

This remains the popular understanding of Keynesian economics to this day: in a slump, governments should borrow money and spend it on useful projects to kick-start a recovery. When the government spends this money, it goes into the pockets of its citizens, who in turn can spend it on other wants and needs, expanding the total size of the economy and ensuring a prosperous recovery rather than a downward spiral in which retrenched spending feeds unemployment and further reductions in spending.

Under the competitive market paradigm, economists had been able to argue that workers were paid a wage equal to the true value they added to the business. With competition whittling away waste and excess, workers would end up receiving what economists called the “marginal productivity” of their work. Each worker would be paid an amount exactly equal to how much more productive he or she made the operation. That meant, particularly for the Austrian economists Hayek and Mises, that complaints about low wages were really complaints about worker productivity. If workers wanted better pay, the only sustainable way to get it was by working harder. But that argument would fall apart if it could be shown that labor markets were not perfectly competitive—if, instead, they exhibited some of the features of monopoly. If the only jobs in town were at the coal mine, then the mine owners wouldn’t have to compete with other employers by offering better pay. When Robinson showed that markets were almost always at least somewhat anticompetitive, she believed she had “hacked through” a “prop to laisser-faire ideology.”11 Capitalists, according to Robinson, were chronically underpaying their staff.

The economic system was understood to be apolitical and self-correcting, akin to population dynamics in the natural world. Everything—wages, commodity prices, interest rates, profits—responded automatically to any unexpected change in other areas, quickly bringing the system to an equilibrium in which the maximum amount of goods was being produced and consumed, so that social needs were met to the greatest extent possible.

The material abundance of the Gilded Age had sown doubts in Keynes about the supposed scarcity of resources, but it was the ravages of the Depression that made him certain the old order had it wrong. Clearly the trouble was not a shortage of production. Crops were rotting in the fields while children went hungry in the streets. Producers were not cutting back because they couldn’t afford to meet the high wage demands of workers; laborers were roaming from town to town, desperate for any work at all. As he wrote in the opening chapter, “It is not very plausible to assert that unemployment in the United States in 1932 was due either to labour obstinately refusing to accept a reduction of money-wages or to its obstinately demanding a real wage beyond what the productivity of the economic machine was capable of furnishing.”32 For Keynes, the empirical fact of the Depression proved that the classical theory was wrong. The economy was not self-correcting. Even if politicians were messing things up with bad policy, the system should at some point between 1919 and 1936 have been able to sort itself out. A bad level for gold in 1925 or a wrong-headed tariff in 1931 should have been no different than a bad harvest or a fire, something quickly remedied by the automated magic of supply, demand, and the price mechanism.

Say’s Law meant that there could not be unspent income in a society. Because the supply of new products created its own demand for them, increased production automatically brought the economic system of payment and consumption into equilibrium at a higher level of activity. When the producer of a good accepted its purchase price and passed that income on to workers in the form of wages (enjoying some himself in the form of profits), he created a new source of demand in society exactly equal to the value of what he had produced. That money would be spent on other goods, ensuring that there could be no deficiency of total demand in the economy. Even the money that people set aside as savings was just another form of spending: spending on the future. Say acknowledged that overproduction might occasionally arise in particular industries but insisted that such problems were “only a passing evil” that couldn’t apply to the economy as a whole for any meaningful period of time.

The possibility of excessive savings carried tremendous consequences. Capitalism would be in a state of overproduction. The supply of goods and services would exceed the demand for those goods and services because money—savings—was not being spent. Producers would respond by cutting production and laying people off. That would bring supply and demand into equilibrium, but it would be a bad equilibrium in which nobody made the investments necessary to hire people and expand production. Unemployment could creep in as a permanent part of a low-functioning economy.

Keynes recognized that money was not only a mechanism for transmitting information about the relative values of different goods; it was also a store of value, which enabled people to make and express judgments about their own material security through time.

“Consumption,” he wrote, “is the sole end and object of all economic activity.”38 But money enables us to put off consumption to another day and another day and another indefinitely without losing our ability to consume at some point. We may substitute holding money for realizing actual material satisfaction not out of vice or confusion but out of simple fear for our future prospects. But when we refuse to consume, we deny others their income. This not only forces society to live with less—it risks making our fear into a contagion, realized in the form of decreased production, layoffs, and suffering amid surplus.

People didn’t actually bet on the value of different enterprises; they bet on the judgments of other speculators. As Keynes put it in one of the few accessible passages from The General Theory: “Professional investment may be likened to those newspaper competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole; so that each competitor has to pick, not those faces which he himself finds prettiest, but those which he thinks likeliest to catch the fancy of the other competitors, all of whom are looking at the problem from the same point of view. It is not a case of choosing those which, to the best of one’s judgment, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest.”39 This didn’t just mean that financial markets were prone to panic and instability, as excitement and emotion overtook cool reasoning; it meant there was no reason to believe that markets ever accurately gauged the value of various investments. Wall Street and the City were perfectly capable of turning extraordinary profits for themselves without doing much for the greater good—indeed, they could do active social harm without intending to. “There is no clear evidence from experience that the investment policy which is socially advantageous coincides with that which is most profitable.”

The chief economic question facing each society, Keynes believed, was no longer what it could afford but how its members would like to live. A titan of industry could not shrug off poverty as an inevitable element of every society. Democracies could choose different paths. Keynes was no longer telling a story about adjusting a machine that generally tended toward a functional, prosperous equilibrium. The General Theory did not prove that governments may need to intervene in the operations of a free market from time to time to correct excesses or imbalances. It showed, instead, that the very idea of a free market independent of government structure and supervision was incoherent. For markets to function, governments had to provide demand. Eras of laissez-faire prosperity like the British golden age before the war were very rare—a “special case” resulting from unique psychological and material circumstances that were impossible to replicate with any regularity through speculative financial markets, in which “the capital development of a country becomes a by-product of the activities of a casino.”

Keynes had, he believed, destroyed “one of the chief social justifications of great inequality of wealth.”48 In his youth, he had understood saving as a virtue that benefited society at large. The fortunes of the rich, accumulated over generations, created a source of investment capital that could be deployed for the benefit of all. With The General Theory, Keynes demonstrated that capital growth was not the result of virtuous saving by the affluent; it was a by-product of the income growth of the masses. Creating large amounts of savings at the top of society did not bring about higher levels of investment. The causal arrow pointed the other way: Creating large amounts of investment caused higher levels of savings. And so “the removal of very great disparities of wealth and income” would improve social harmony and economic functionality.

Keynes argued that the utilitarian moral philosophers of the eighteenth and nineteenth centuries had popularized “a perverted theory of the state” guided by “business arithmetic” in which the final judgment on the social value of any activity was to be found in whether it turned a profit.51 But the market, he argued, was not a reliable statement of society’s preferences, and it could not invisibly guide a polity to salvation. The market simply failed to deliver a host of real social goods that the public enjoyed, particularly art. The things that make life meaningful—beauty, community, a vibrant and multifaceted culture—all required collective, coordinated action. “Our experience has demonstrated plainly that these things cannot be successfully carried on if they depend on the motive of profit and financial success. The exploitation and incidental destruction of the divine gift of the public entertainer by prostituting it to the purposes of financial gain is one of the worser crimes of present-day capitalism.”

Do not discount the power of ideas to triumph over the economic interests of the ruling class. The vested interests of the capitalists, he argued, did not reign sovereign over the great gears of human history; the beliefs and ideas of the people did. They could choose to shrug off the suffering and dysfunction of the past two decades without resorting to violent revolutionary upheaval. All they needed was to be convinced by an idea. Is the fulfillment of these ideas a visionary hope?…The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas. Not, indeed, immediately, but after a certain interval; for in the field of economic and political philosophy there are not many who are influenced by new theories after they are twenty-five or thirty years of age, so that the ideas which civil servants and politicians and even agitators apply to current events are not likely to be the newest. But, soon or late, it is ideas, not vested interests, which are dangerous for good or evil.

“When F.D.R. came to office in March 1933, so desperate was the economic position that for the business and financial community he was an angel of rescue,” he later wrote. “By 1934, things were enough better so that his efforts on behalf of farmers and the unemployed, his tendency to make light of economic orthodoxy, could be disliked and even feared. Roosevelt had become ‘that man in the White House’ and ‘the traitor to his class.’ ”34 The ill will between Roosevelt and the rich was a matter of power, not results. No peacetime U.S. president in the years since has matched the economic growth achieved during the first three full years of FDR’s administration. Adjusted for inflation, the economy grew by a monumental 10.8 percent, 8.9 percent, and 12.9 percent during 1934, 1935, and 1936, respectively.35 Over the course of his first term, the unemployment rate plunged from over 20 percent to less than 10 percent, as the ranks of the unemployed were thinned by more than half, from roughly 11.5 million to 4.9 million (there were about 1.4 million unemployed prior to the stock market crash).36 Only once has a U.S. wartime economy matched Roosevelt’s initial economic miracle—a few years later, during the mobilization for World War II. Though FDR had to wrestle with Congress, the Supreme Court, and even himself over spending, taxes, regulations, budget deficits, and everything else that made up the New Deal, he was in fact spending a lot of money, nearly doubling the expenditures of the federal government from $4.6 billion to $8.2 billion as the deficit surged from $2.6 billion to $4.3 billion—though he offset some of the deficit impact of his new programs by increasing taxes on the wealthy. Those figures were modest compared to what Keynes had advocated and indeed compared to what was to come. In his 1934 trip to the United States, Keynes had advocated annual deficits of $4.8 billion to members of the administration. In 1936, federal outlays still accounted for less than one-tenth of the total U.S. economy. By the end of the war, government projects would total $92.7 billion a year and account for more than 40 percent of all U.S. economic activity (since the beginning of Ronald Reagan’s presidency, spending has fluctuated by a few percentage points around 20 percent of gross domestic product).37 All of this offended the policy sensibilities of the elite, who hated progressive taxation, deficits, and devaluation as much as the British banking establishment did. But there was more at stake than Wall Street’s bottom line. The New Deal did not, in fact, crimp legitimate business on Wall Street; Roosevelt just reorganized it. In 1935, with the United States off gold and onto Glass-Steagall, and with the SEC policing traders and the federal government incurring unheard-of deficits, the amount of securities offerings underwritten by investment banks expanded to four times the level of the previous year.38 With the economy growing rapidly, brokers and traders had more work to do. Everybody did. But the rich, as a group of Harvard economists observed, continued to “complain bitterly” of their tax burden, which they perceived as a violation of “divine right”—even though “the additions to their incomes, resulting from the government’s activities, are far greater in amount than the additional taxes they pay.”39 Jack Morgan, according to one chronicler of the family, viewed the New Deal “less as a set of economic reforms than as a direct, malicious assault on the social order.”40 Which, of course, it was. Morgan was only the most obvious, iconic embodiment of what was quickly becoming a hereditary American nobility. Close friends with King George V, adored by the king’s infant granddaughter who would one day become the second Queen Elizabeth, Jack enjoyed traditional aristocratic recreations, shooting pheasant when the affairs of his firm overtaxed his nerves. But whereas the landed European gentry of the nineteenth century had understood themselves as a chosen elect, Morgan and his elite countrymen believed they had won their place in society through business acumen and the sound stewardship of a grateful society. That was an incredible idea for a man who had been handed the most powerful post in American finance from his father, who in turn had inherited the banking house from his father before him. It was nevertheless sincere. Even the great scourge of Wall Street, Ferdinand Pecora, commended Morgan for his “deeply genuine” testimony before his Senate committee, in which Jack stated it was impossible for a “private banker” to “become too powerful,” because such status was attained “not from the possession of large means, but from the confidence of the people” and the “respect and esteem of the community.”41 This self-conception was fed by the energy both Jack and his father had devoted to philanthropy, paying hundreds of thousands of dollars a year in salaries for Episcopalian clergy and underwriting social services offered by the church. Jack even opened his father’s study and art collection to the public as a museum. That was standard social stewardship for the Carnegies, Mellons, and Fricks who dominated the U.S. economy. The New Deal dynamited the whole worldview. Not only had FDR shackled families like the Morgans with new taxes, regulations, auditors, and overlords, his system actually worked. It was not the great genius of financial patricians that made the economy grow at unheard-of rates; it was, as Keynes had argued, the purchasing power of the masses. It sent Morgan into paroxysms of fury. Even the mention of Teddy Roosevelt prompted him to scream “God damn all Roosevelts!”42 As his sense of self-worth and place in society collapsed, he retreated to the safety of his banking fief, discarding his former sense of noblesse oblige. “I just want you to know,” he shouted to Dawes Plan architect Owen Young, “that I don’t care a damn what happens to you or anybody else. I don’t care what happens to the country….All I care about is this business! If I could help it by going out of this country and establishing myself somewhere else I’d do it—I’d do anything.”43 “Regardless of party and regardless of region, today, with few exceptions,” wrote Time, “members of the so-called Upper Class frankly hate Franklin Roosevelt.”44 The president returned the favor. Subjected to relentless attacks from “the Wall Street bankers” throughout his first term, he denounced them as “economic royalists” in a fiery speech to the Democratic National Convention in 1936. “They had begun to consider the Government of the United States as a mere appendage to their own affairs,” he roared from the podium. “We know now that Government by organized money is just as dangerous as Government by organized mob. Never before in all our history have these forces been so united against one candidate as they stand today. They are unanimous in their hate for me—and I welcome their hatred!”45 There was at least as much political calculation in FDR’s posture as genuine outrage. His inner circle still included a few baffled but pragmatic bankers, typically from outsider firms or those allied with new industries. Sidney Weinberg, head of the then-minor investment bank Goldman Sachs, was an FDR confidant from the 1932 campaign until the president’s death.46 And FDR studiously courted advice from and sought avenues for agreement with Morgan partner Owen D. Young. A conservative Democrat, Young tried his best to cooperate, though in moments of weakness he wondered if a “totalitarian state” might not be better equipped than Roosevelt’s version of democracy to administer “economically desirable” “self-discipline”—particularly corporate tax cuts.47 But Roosevelt’s counterpunches against the elite had a powerful effect on public opinion. The financiers who denounced him were not going to vote Democrat, but attacks raining down onto Roosevelt from such prestigious men could erode support among voters who were genuinely on the fence. Roosevelt called into question the legitimacy of his opponents and rallied his own supporters against them. Anti-FDR fervor was no longer a reasoned critique from learned men but merely the kind of thing you could expect from people who didn’t like democracy. “When Roosevelt countered, a whole generation joined on his side,” Galbraith observed. “If the privileged were against Roosevelt, we obviously must be against privilege. If Roosevelt found the moral posture of big business unconvincing or fraudulent, it must be so.”

Consciously or not, FDR was taking the ideas of The Economic Consequences of the Peace and expanding them into a foreign policy doctrine of breathtaking ambition: In the future days, which we seek to make secure, we look forward to a world founded upon four essential human freedoms. The first is freedom of speech and expression—everywhere in the world. The second is freedom of every person to worship God in his own way—everywhere in the world. The third is freedom from want—which, translated into world terms, means economic understandings which will secure to every nation a healthy peacetime life for its inhabitants—everywhere in the world. The fourth is freedom from fear—which, translated into world terms, means a world-wide reduction of armaments to such a point and in such a thorough fashion that no nation will be in a position to commit an act of physical aggression against any neighbor—anywhere in the world. That is no vision of a distant millennium. It is a definite basis for a kind of world attainable in our own time and generation. That kind of world is the very antithesis of the so-called new order of tyranny which the dictators seek to create with the crash of a bomb.

Subsequent American war advocates have invariably cited the protection of human rights abroad as an overriding moral concern, often attesting to high ideals to divert attention from less benign motivations: claims on resources, imperial strategy, or simple belligerence. The pattern began in World War II. While FDR pitched the conflict to Americans as a fight for human rights “anywhere in the world,” the U.S. State Department—the chief organ of American diplomacy—repeatedly refused aid to Jewish refugees. On the West Coast, more than 100,000 Japanese Americans were forced from their homes and ordered to report to internment camps, a policy that originated in Roosevelt’s War Department.

But with the war orders coming in on a massive scale, Keynes insisted that it was only a matter of time until rapid price increases took effect. Americans would need to have a battle plan ready when they did. First, he said, speculators anticipating an increase in production from the war would bid up the prices of key commodities—everything from cotton for uniforms to iron, coal, and cement. Next, as workers joined the military or filled positions in military manufacturing, employers would begin offering higher salaries to attract and retain talent. After that, labor unions, correctly perceiving their greater leverage with employers, would begin to demand—and receive—higher pay under collective bargaining contracts. All of this would have an impact on prices. Commodity speculation would raise the cost of raw goods for manufacturers and force them to charge retailers more, while retailers would sense the better purchasing position of their customers and raise prices themselves. The entire phenomenon would be exacerbated by the fact that enormous segments of the economy, though operating at full tilt and with essentially no unemployment, would be producing war materiel for use overseas rather than consumer goods to be purchased at home. The purchasing power created by widespread availability of good-paying jobs would face a shortage of products it could actually buy. Demand would rage far ahead of supply. Without “heavy taxation, a high pressure savings campaign or rationing on a wide scale,” the United States was in store for an inflationary explosion.

During World War I, rising prices had accrued to industrialists in the form of higher profits, which were then taxed away by the government, borrowed by the government, or spent on consumer goods, further driving up their prices. When those profits were borrowed, the industrialists received an asset—bonds—that their workers did not. Workers benefited only in the form of higher pay—and that was cold comfort, since the value of their paychecks was steadily being inflated away. The most egalitarian method, of course, would have been to tax profits to the hilt—but there was a limit to how much governments could actually tax. In the United States, for instance, the tax rate on the highest incomes would eventually reach 94 percent during the war. For taxes to really do the trick, they would ultimately have to hit working people of more modest means. By forcing workers to accept a program of “deferred pay,” Keynes was attempting to redistribute postwar wealth from the investor class to the working class. The title of the piece is misleading. Compulsory savings wouldn’t really “pay” for anything. By hook or by crook, the British government was going to maximize war production. When it wanted bombs, it would make them, and, since the gold standard was long gone, it could print the money to pay for them without having to yoke its printing presses to the amount of gold at the Bank of England. Mandatory savings were a way of managing inflation. By pulling demand out of the economy—reducing the purchasing power of ordinary people—Keynes wanted to limit their ability to bid up retail prices. This was a critical observation about the way money, debt, and even taxes functioned in a post–gold standard world. In 1931, it had been possible for the British government to spend so much money that it could not meet its debt obligations, because it could print only so much money; its debts were written in pounds tied to a certain amount of gold. Under the gold standard, it was possible for a government to run out of money; there was only so much gold in the vaults. But a government that controlled its own currency, Keynes observed, could not go bankrupt. Under the fiat currency that had prevailed in Great Britain since 1931, the government could easily print its way out of excessive debt. Taken to extremes, the consequence of that strategy would be inflation, of course. And so the purpose of taxes—or deferred savings or any similar instrument—was not to “pay” for government services but to regulate the value of money.

By declaring “freedom from want” a human right, FDR had presented the social reforms of the New Deal as a moral imperative every bit as pressing as the military defeat of Nazism. By including it in the Atlantic Charter, he and Churchill had declared personal economic security a defining characteristic of any democracy, a bedrock guarantee that distinguished a free society from tyranny. Hayek turned this argument on its head—a daring maneuver at the height of the war that had transformed FDR and Churchill into figures of public adulation. The very idea of “economic freedom,” Hayek argued, was antithetical to what true advocates of political freedom had championed for centuries. “Freedom from necessity,” he claimed, was an inherently “socialist” idea. It was not a bulwark for the democracies against Nazism but an ingredient of Nazism and Soviet communism alike, which could only be effectively implemented by a violent dictatorship that crushed other political rights.

The antigovernment refrain of The Road to Serfdom was perfectly in key with Mises’ uncompromising libertarian tract Bureaucracy, published in the same year, in which Hayek’s mentor forcefully declared New Deal liberalism a variant of authoritarian communism. “Capitalism means free enterprise, sovereignty of the consumers in economic matters, and sovereignty of the voters in political matters,” he wrote. “Socialism means full government control of every sphere of the individual’s life….There is no compromise possible between these two systems.”12 You could have laissez-faire, or you could have Soviet Russia; there was no middle ground. Hayek recognized that the all-or-nothing severity of his old instructor was a political dead end in an era in which every government seemed to be pursuing new Keynesian reforms. And so, like Lippmann before him, Hayek attempted to graft his laissez-faire conception of liberty onto something compatible with the emerging modern nation-state. The government might be allowed to maintain some basic minimum standard of living for everyone, after all. He drew a distinction between “regulation”—which was merely designed to solve obvious problems—and dangerous “planning”—which could only be achieved by a dictator orchestrating the lives and limiting the choices of free individuals. The size and scope of corporate enterprises, he argued, should be closely limited and monitored to prevent big firms from interfering with free competition in the marketplace.

In The End of Laissez-Faire, Keynes had argued that liberalism could not stand on abstract principles alone; it had to actually deliver the goods for the people who lived under it. Laissez-faire had led to vast inequality and grinding depression, failing a basic test for democratic legitimacy. By shrugging off the practical shortcomings of laissez-faire, Keynes argued, Hayek had deluded himself about the causes of dictatorship in Germany. The economic fuel for the rise of Hitler had been the suffering and despair generated by deflation—not the social welfare policies Hayek decried as “socialism.” The democracies of the world could not turn their backs on the economic strategies that had rejuvenated them in the late 1930s and 1940s; doing so would only unleash a new wave of political uncertainty, encouraging new authoritarian social movements. Hayek’s call to abandon the New Deal and Keynesian economic management was a recipe for more strongmen. “What we need therefore, in my opinion, is not a change in our economic programmes, which would only lead in practice to disillusion with the results of your philosophy,” he wrote, “but perhaps even the contrary, namely, an enlargement of them.”

Hayek and Keynes agreed that democracy was not the fundamental organizing principle of society; it was a tool for achieving more important goals. They even agreed that the most critical function of democracy was its ability to produce a vibrant, elite culture. The value Keynes placed on Bloomsbury was in some respects very similar to Hayek’s appreciation for the old Viennese aristocracy. But to Keynes, nothing was lost in guiding all the world to Bloomsbury, while for Hayek, aristocracy was inherently exclusive; the whole point was that not everyone could be an aristocrat.

Unemployment was a breeding ground for fascism. It created dangerous political instability and a source of anger that could easily be weaponized. The terms of trade might help or hurt efforts to establish international goodwill, but tariffs or no tariffs, the legitimacy of an international economic order depended entirely on whether it did, in fact, provide for mutual prosperity.

The gold standard, he maintained, had broken down because it forced countries into deflationary corners. Countries that ran trade deficits became entirely responsible for restoring trade balance, Keynes believed, and they would eventually be placed in a position where they could only achieve competitive prices for their goods abroad by forcing down domestic wages, causing mass domestic unemployment. If Britain, for instance, ran a trade deficit with the United States by importing more than it exported, it would result in a balance-of-payments problem: Britain would be paying out more money to the United States than it was taking in. If the situation persisted long enough, Britain would run out of money with which to pay for American goods. This problem could in theory be resolved by international lending. If Americans, flush with money earned by exporting so many goods, made loans on reasonable terms to Great Britain, then the British would have the money needed to keep buying exports.

Under the ethical norms of the gold standard, the resulting suffering was the price a country had to pay for being weak or lazy. Keynes readily accepted that many countries had ineffective economic infrastructure. But nations often ran trade deficits because they had to, not because they were any more or less reckless than countries running trade surpluses. What’s more, governments that ran surpluses weren’t in fact being injured by countries that ran deficits. Though the deficit country would run up large financial debts, the surplus country enjoyed a fat export trade that employed its workers and raised its standard of living. The gold standard ethic heaped shame upon countries for piling up large debts, but it was the surplus countries that benefited most from those debts—and benefited at the expense of the debtor country employment. Keynes recognized that in the international order, as in ordinary life, the real villains were rarely beggars.

In Samuelson’s hands, human behavior and the economy more broadly were best understood as rational, profit-maximizing endeavors. Markets would clear themselves, and supply and demand would find their own rational equilibrium, just as David Ricardo and Adam Smith had posited long ago. But they would only do so, according to Samuelson, when the economy was operating at something close to full employment. By deploying Keynesian deficit spending or providing Keynesian tax cuts, policy makers could keep the economy from slipping “into a topsy-turvy wonderland where right seems left and left is right; up seems down; and black, white.”11 So long as unemployment did not spin out of control, the rational, profit-maximizing behavior of human beings would allow statistics to reliably predict when and where economic forces would reach equilibrium—if the data were sufficiently accurate.

With the age of economic scarcity ended, Galbraith believed that many of the objections economists had raised about economic organization in the past were no longer significant. Corporate monopolies might well be wasteful, but waste was not very important. What mattered was power. And even tremendous concentrations of power such as those of the modern corporation were not necessarily a problem so long as they were “countervailed” by other great powers—other large corporations in the supply chain or distribution scheme or, more important, powerful labor unions and a powerful government.

The whole point of The General Theory, she believed, was to show that economic production could not be understood as a self-sustaining set of processes independent from social norms and political realities.

American Capitalism had celebrated the end of scarcity. Now The Affluent Society decried the country’s increasing dependence on unnecessary production to establish the financial security of most families. The relentless postwar reliance on boosting economic output as the chief, if not only, means of improving the American standard of living had subjugated the work of democracy to the mechanics of the market. Nobody in her right mind would choose to work longer hours for dirty public parks. But that was what the logic of the market was dictating, because the market could only reward ideas that turned a profit. Nobody stood to profit from clean parks; they were just nicer to live with than dirty parks. But if nobody made the political judgment that clean parks were better, a society organized around profit incentives from production alone would almost automatically end up with dirty parks. The market was not an impartial guide to the beliefs of the public, and some of its verdicts were crazy.

Under the leadership of Marriner Eccles in the 1930s, the Fed board of governors in Washington had effectively fused with the Treasury Department, allowing the United States to pursue a unified fiscal and monetary agenda. Under the arrangement, the Fed pursued a monetary policy that kept interest rates low and money cheap for both banks and the federal government. Inflation and unemployment were managed not by interest rate adjustments but by fiscal policy—government spending and taxation—and, during the war, price controls. From 1937 to 1947, the Fed kept the discount rate at 1 percent, and beginning in 1942, it publicly coordinated monetary policy with the Treasury Department to keep down the interest rate on World War II bonds. Even after the war, when inflation briefly shot up after price controls were eliminated, the United States didn’t battle rising prices with high interest rates and the unemployment high interest rates created. As late as 1951, the discount rate was still just 1.75 percent, and the Fed remained formally committed to guaranteeing a specific, predictable interest rate on U.S. government debt.

Helping the rich get richer, Kennedy had argued, was the surest way to help the country. “I am not sure,” Galbraith had previously told Kennedy, “what the advantage is in having a few more dollars to spend if the air is too dirty to breathe, the water too polluted to drink, the commuters are losing out on the struggle to get in and out of the cities, the streets are filthy, and the schools so bad that the young, perhaps wisely, stay away.”

According to Friedman, there was a “natural rate” of unemployment below which no policy maker, fiscal or monetary, could push the economy without causing inflation. It was hard to pinpoint just what this “natural rate” was; it depended on technology, productivity, unionization rates, and regulatory policies. But tinkering with fiscal or monetary policy to boost employment was a fool’s errand.

Two weeks after the president told Connally to go off on Galbraith, the British Treasury informed the Nixon administration that it was about to shore up the pound by redeeming $3 billion in U.S. assets—dollars and Treasury securities—for gold. It was, in essence, a vote of no confidence against American inflation management. The United States was the only country in the Bretton Woods system with a currency convertible into gold. For the British, there was no difference between holding a dollar bill and holding the dollar’s exchange weight in gold—unless they expected the value of those dollars to decline. The United States had been leaking gold for years thanks to inflationary pressures and the new phenomenon of an American trade deficit. And so U.S. trading partners increasingly preferred holding gold to holding dollars. Great Britain’s decision was sure to rattle financial markets all over the world. A bold, multibillion-dollar gesture from a close diplomatic ally might even spark a run on the dollar.

Academic economics became dominated by conservative ideas. Monetarism quickly faded once Volcker found he couldn’t accurately or effectively target the precise supply of money in the economy. It was replaced by the rational expectations hypothesis, formulated by future Nobel laureate Robert Lucas. The rational expectations school essentially took Friedman’s ideas about price expectations and applied them to government policy. Rational people, according to Lucas, would factor the future effects of any change in tax rates or regulatory arrangements into their economic decisions. Increasing government spending to boost the economy was futile, according to this thinking, because people would recognize that the resulting budget deficit would eventually have to be cured through higher taxes and would therefore save any money they received in anticipation of future tax bills. As a result, it was impossible for policy makers to make any lasting improvement in the lives of citizens through macroeconomic management; the market would quickly adjust and subsequently overrule the government meddlers. It was as if Keynes had never existed; uncertainty had given way to hyperrationality and the ability to see the future. Lucas even went so far as to claim that his work had rendered the entire field of macroeconomics superfluous.

At its core, The General Theory of Employment, Interest and Money was a book about the dangers and limitations of financial markets. Given uncertainty about the future, it was impossible for markets to accurately price the full slate of risks attached to any financial asset. Investors were constantly processing new, unexpected information and attitudes, including their own. If a society relied excessively on financial markets to allocate resources, develop research, and improve industry, Keynes believed, it was destined for underperformance, instability, and unemployment. He had designed a theory and a policy agenda in which financial markets were subjugated to the authority of the state, believing the coordinated action of a government was capable of meeting the investment needs of society which financial markets could only secure through fleeting accidents. The Clinton administration was doing the opposite of what Keynes had prescribed: subjugating both the governing agenda of American democracy and the direction of global economic development to the currents of international capital markets.

As Joseph Stiglitz concluded in 2017, globalization “was an agenda that was driven by large corporations at the expense of workers, consumers, [and] citizens in both the developed and developing world.”39 The social milieus of citizens and shareholders became increasingly divergent, leading to disparities not only in wealth but in education and physical health, with those further down the income ladder registering lower test scores and shorter life expectancies, according to the OECD.40 The result has been heightened political tension not only between different countries but within individual nation-states as economically insecure populations question whether they do in fact belong to the same political project as their more affluent neighbors. “I think globalization has contributed to tearing societies apart,” argues economist Dani Rodrik.

The central problems of the twentieth century, Keynes argued, were best solved by alleviating inequality. Enterprise and economic growth were driven not by the unique genius and vast fortunes of the very rich but by the purchasing power of the masses, which created markets for new ideas. To put people to work, governments needed to create systems of support for the poor and the middle class, not new favors for the rich.

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