Second to None in the Creation of Extraordinary Wealth

The most important historical question to help understand our rise from the muck to modern civilization is: how did we go from linear to exponential productivity growth? Let’s call that question “who started modernity?” People often look to the industrial revolution, which is certainly an acceleration of growth…but it is hard to say it caused the growth because it came centuries after the initial uptick. Historians also bring up the Renaissance, but this is also a mislead due to the ‘written bias’ of focusing on books, not actions; the Renaissance was more like the window dressing of the Venetian commercial revolution of the 11th and 12th centuries, which is in my opinion the answer to “who started modernity.” However, despite being the progenitors of modern capitalism (which is worth a blog in and of itself), Venice’s growth was localized and did not spread immediately across Europe; instead, Venice was the regional powerhouse who served as the example to copy. The Venetian model was also still proto-banking and proto-capitalism, with no centralized balance sheets, no widespread retail deposits, and a focus on Silk Road trade. Perhaps the next question is, “who spread modernity across Europe?” The answer to this question is far easier, and in fact can be centered to a huge degree around a single man, who was possibly the richest man of all time: Jakob Fugger.

Jakob Fugger was born to a family of textile traders in Augsburg in the 15th century, and after training in Venice, revolutionized banking and trading–the foundations on which investment, comparative advantage, and growth were built–as well as relationships between commoners and aristocrats, the church’s view of usury, and even funded the exploration of the New World. He was the only banker alive who could call in a debt on the powerful Holy Roman Emperor, Charles V, mostly because Charles owed his power entirely to Fugger. Strangely, he is perhaps best known for his philanthropic innovations (founding the Fuggerei, which were some of the earliest recorded philanthropic housing projects and which are still in operation today); this should be easily outcompeted by:

  1. His introduction of double entry bookkeeping to the continent
  2. His invention of the consolidated balance sheet (bringing together the accounts of all branches of a family business)
  3. His invention of the newspaper as an investment-information tool
  4. His key role in the pope allowing usury (mostly because he was the pope’s banker)
  5. His transformation of Maximilian from a paper emperor with no funding, little land, and no power to a competitor for European domination
  6. His funding of early expeditions to bring spices back from Indonesia around the Cape of Good Hope
  7. His trusted position as the only banker who the Electors of the Holy Roman Empire would trust to fund the election of Charles V
  8. His complicated, mostly adversarial relationship with Martin Luther that shaped the Reformation and culminated in the German Peasant’s War, when Luther dropped his anti-capitalist rhetoric and Fugger-hating to join Fugger’s side in crushing a modern-era messianic figure
  9. His involvement in one of the earliest recorded anti-trust lawsuits (where the central argument was around the etymology of the word “monopoly”)
  10. His dissemination, for the first time, of trustworthy bank deposit services to the upper middle class
  11. His funding of the military revolution that rendered knights unnecessary and bankers and engineers essential
  12. His invention of the international joint venture in his Hungarian copper-mining dual-family investment, where marriages served in the place of stockholder agreements
  13. His 12% annualized return on investment over his entire life (beating index funds for almost 5 decades without the benefit of a public stock market), dying the richest man in history.

The story of Fugger’s family–the story, perhaps, of the rise of modernity–begins with a tax record of his family moving to Augsburg, with an interesting spelling of his name: “Fucker advenit” (Fugger has arrived). His family established a local textile-trading family business, and even managed to get a coat of arms (despite their peasant origins) by making clothes for a nobleman and forgiving his debt.

As the 7th of 7 sons, Jakob Fugger was given the least important trading post in the area by his older brothers; Salzburg, a tiny mountain town that was about to have a change in fortune when miners hit the most productive vein of silver ever found by Europeans until the Spanish found Potosi (the Silver Mountain) in Peru. He then began his commercial empire by taking a risk that no one else would.

Sigismund, the lord of Salzburg, was sitting on top of a silver mine, but still could not run a profit because he was trying to compete with the decadence of his neighbors. He took out loans to fund huge parties, and then to expand his power, made the strategic error of attacking Venice–the most powerful trading power of the era. This was in the era when sovereigns could void debts, or any contracts, within their realm without major consequences, so lending to nobles was a risky endeavor, especially without backing of a powerful noble to force repayment or address contract breach.

Because of this concern, no other merchant or banker would lend to Sigismund for this venture because sovereigns could so easily default on debts, but where others saw only risk, Fugger saw opportunity. He saw that Sigismund was short-sighted and would constantly need funds; he also saw that Sigismund would sign any contract to get the funds to attack Venice. Fugger fronted the money, collateralized by near-total control of Sigismund’s mines–if only he could enforce the contract.

Thus, the Fugger empire’s first major investment was in securing (1) a long-term, iterated credit arrangement with a sovereign who (2) had access to a rapidly-growing industry and was willing to trade its profits for access to credit (to fund cannons and parties, in his case).

What is notable about Fugger’s supposedly crazy risk is that, while it depended on enforcing a contract against a sovereign who could nullify it with a word, he still set himself up for a consistent, long-term benefit that could be squeezed from Sigismund so long as he continued to offer credit. This way, Sigismund could not nullify earlier contracts but instead recognized them in return for ongoing loan services; thus, Fugger solved this urge toward betrayal by iterating the prisoner’s dilemma of defaulting. He did not demand immediate repayment, but rather set up a consistent revenue stream and establishing Fugger as Sigismund’s crucial creditor. Sigismund kept wanting finer things–and kept borrowing from Fugger to get them, meaning he could not default on the original loan that gave Fugger control of the mines’ income. Fugger countered asymmetrical social relationships with asymmetric terms of the contract, and countered the desire for default with becoming essential.

Eventually, Fugger met Maximilian, a disheveled, religion-and-crown-obsessed nobleman who had been elected Holy Roman Emperor specifically because of his lack of power. The Electors wanted a paper emperor to keep freedom for their principalities; Maximilian was so weak that a small town once arrested and beat him for trying to impose a modest tax. Fugger, unlike others, saw opportunity because he recognized when aligning paper trails (contracts or election outcomes) with power relationships could align interests and set him up as the banker to emperors. When Maximilian came into conflict with Sigismund, Fugger refused any further loans to Sigismund, and Maximilian forced Sigismund to step down. Part of Sigismund’s surrender and Maximilian’s new treaty included recognizing Fugger’s ongoing rights over the Salzburg mines, a sure sign that Fugger had found a better patron and solidified his rights over the mine through his political maneuvering–by denying a loan to Sigismund and offering money instead to Maximilian. Once he had secured this cash cow, Fugger was certainly put in risky scenarios, but didn’t seek out risk, and saw consistent yearly returns of 8% for several decades followed by 16% in the last 15 years of his life.

From this point forward, Fugger was effectively the creditor to the Emperor throughout Maximilian’s life, and built a similar relationship: Maximilian paid for parties, military campaigns, and bought off Electors with Fugger funds. As more of Maximilian’s assets were collateralized, Fugger’s commercial empire grew; he gained not only access to silver but also property ownership. He was granted a range of fiefs, including Arnoldstein, a critical trade juncture where Austria, Italy, and Slovenia border each other; his manufacturing and trade led the town to be renamed, for generations, Fuggerau, or Place of Fugger.

These activities that depended on lending to sovereigns brings up a major question: How did Fugger get the money he lent to the Emperor? Early in his career, he noted that bank deposit services where branches were present in different cities was a huge boon to the rising middle-upper class; property owners and merchants did not have access to reliable deposit services, so Fugger created a network of small branches all offering deposits with low interest rates, but where he could grow his services based on the dependability of moving money and holding money for those near, but not among, society’s elites. This gave him a deep well of dispersed depositors, providing him stable and dependable capital for his lending to sovereigns and funding his expanding mining empire.

Unlike modern financial engineers, who seem to focus on creative ways to go deeper in debt, Fugger’s creativity was mostly in ways that he could offer credit; he was most powerful when he was the only reliable source of credit to a political actor. So long as the relationship was ongoing, default risk was mitigated, and through this Fugger could control the purse strings on a wide range of endeavors. For instance, early in their relationship (after Maximilian deposed Sigismund and as part of the arrangement made Fugger’s interest in the Salzburg mines more permanent), Maximilian wanted to march on Rome as Charlemagne reborn and demand that the pope personally crown him; he was rebuffed dozens of times not by his advisors, but by Fugger’s denial of credit to hire the requisite soldiers.

Fugger also innovated in information exchange. Because he had a broad trading and banking business, he stood to lose a great deal if a region had a sudden shock (like a run on his banks) or gain if new opportunities arose (like a shift in silver prices). He took advantage of the printing press–less than 40 years after Gutenberg, and in a period when most writing was religious–to create the first proto-newspaper, which he used to gather and disseminate investment-relevant news. Thus, while he operated a network of small branches, he vastly improved information flow among these nodes and also standardized and centralized their accounting (including making the first centralized/combined balance sheet).

With this broad base of depositors and a network of informants, Fugger proceeded to change how war was fought and redraw the maps of Europe. Military historians have discussed when the “military revolution” that shifted the weapons, organization, and scale of war for decades, often centering in on Swedish armies in the 1550s as the beginning of the revolution. I would counter-argue that the Swedes simply continued a trend that the continent had begun in the late 1400’s, where:

  1. Knights’ training became irrelevant, gunpowder took over
  2. Logistics and resource planning were professionalized
  3. Early mechanization of ship building and arms manufacturing, as well as mining, shifted war from labor-centric to a mix of labor and capital
  4. Multi-year campaigns were possible due to better information flow, funding, professional organization
  5. Armies, especially mercenary groups, ballooned in size
  6. Continental diplomacy became more centralized and legalistic
  7. Wars were fought by access to creditors more than access to trained men, because credit could multiply the recruitment/production for war far beyond tax receipts

Money mattered in war long before Fugger: Roman usurpers always took over the mints first and army Alexander showed how logistics and supply were more important than pure numbers. However, the 15th century saw a change where armies were about guns, mercenaries, technological development, and investment, and above all credit, and Fugger was the single most influential creditor of European wars. After a trade dispute with the aging Hanseatic League over their monopoly of key trading ports, Fugger manipulated the cities into betraying each other–culminating in a war where those funded by Fugger broke the monopolistic power of the League. Later, because he had a joint venture with a Hungarian copper miner, he pushed Charles V into an invasion of Hungary that resulted in the creation of the Austro-Hungarian Empire. These are but two of the examples of Fugger destroying political entities; every Habsburg war fought from the rise of Maximilian through Fugger’s death in 1527 was funded in part by Fugger, giving him the power of the purse over such seminal conflicts as the Italian Wars, where Charles V fought on the side of the Pope and Henry VIII against Francis I of France and Venice, culminating in a Habsburg victory.

Like the Rothschilds after him, Fugger gained hugely through a reputation for being ‘good for the money’; while other bankers did their best to take advantage of clients, he provided consistency and dependability. Like the Iron Bank of Braavos in Game of Thrones, Fugger was the dependable source for ambitious rulers–but with the constant threat of denying credit or even war against any defaulter. His central role in manipulating political affairs via his banking is well testified during the election of Charles V in 1519. The powerful kings of Europe– Francis I of France, Henry VIII of England, and Frederick III of Saxony all offered huge bribes to the Electors. Because these sums crossed half a million florins, the competition rapidly became one not for the interest of the Electors–but for the access to capital. The Electors actually stipulated that they would not take payment based on a loan from anyone except Fugger; since Fugger chose Charles, so did they.

Fugger also inspired great hatred by populists and religious activists; Martin Luther was a contemporary who called Fugger out by name as part of the problem with the papacy. The reason? Fugger was the personal banker to the Pope, who was pressured into rescinding the church’s previously negative view of usury. He also helped arrange the scheme to fund the construction of the new St. Peter’s basilica; in fact, half of the indulgence money that was putatively for the basilica was in fact to pay off the Pope’s huge existing debts to Fugger. Thus, to Luther, Fugger was greed incarnate, and Fugger’s name became best known to the common man not for his innovations but his connection to papal extravagance and greed. This culminated in the 1525 German Peasant’s War, which saw an even more radical Reformer and modern-day messianic figure lead hordes of hundreds of thousands to Fuggerau and many other fortified towns. Luther himself inveighed against these mobs for their radical demands, and Fugger’s funding brought swift military action that put an end to the war–but not the Reformation or the hatred of bankers, which would explode violently throughout the next 100 years in Germany.

This brings me to my comparison: Fugger against all of the great wealth creators in history. What makes him stand head and shoulders above the rest, to me, is that his contributions cross so many major facets of society: Like Rockefeller, he used accounting and technological innovations to expand the distribution of a commodity (silver or oil), and he was also one of the OG philanthropists. Like the Rothschilds’ development of the government bond market and reputation-driven trust, Fugger’s balance-sheet inventions and trusted name provided infrastructural improvement to the flow of capital, trust in banks, and the literal tracking of transactions. However, no other capitalist had as central of a role in religious change–both as the driving force behind allowing usury and as an anti-Reformation leader. Similarly, few other people had as great a role in the Age of Discovery: Fugger funded Portuguese spice traders in Indonesia, possibly bankrolled Magellan, and funded the expedition that founded Venezuela (named in honor of Venice, where he trained). Lastly, no other banker had as influential of a role in political affairs; from dismantling the Hanseatic League to deciding the election of 1519 to building the Habsburgs from paper emperors to the most powerful monarchs in Europe in two generations, Fugger was the puppeteer of Europe–and such an effective one that you have barely heard of him. Hence, Fugger was not only the greatest wealth creator in history but among the most influential people in the rise of modernity.

Fugger’s legacy can be seen in his balance sheet of 1527; he basically developed the method of using it for central management, its only liabilities were widespread deposits from the upper-middle class (and his asset-to-debt ratio was in the range of 7-to-1, leaving an astonishingly large amount of equity for his family), and every important leader on the continent was literally in his debt. It also showed him to have over 1 million florins in personal wealth, making him one of the world’s first recorded millionaires. The title of this post was adapted from a self-description written by Jakob himself as his epitaph. As my title shows, I think it is fairer to credit his wealth creation than his wealth accumulation, since he revolutionized multiple industries and changed the history of capitalism, trade, European politics, and Christianity, mostly in his contribution to the credit revolution. However, the man himself worked until the day he died and took great pride in being the richest man in history.

All information from The Richest Man Who Ever Lived. I strongly recommend reading it yourself–this is just a taster!


  1. Vienna: city of paradox Alexander Carpenter, Aeon
  2. The Vienna of Ludwig von Mises Schulak & Unterköfler, Mises Daily
  3. Empire of Abstraction: British anthropology Nile Davies, JHIblog
  4. Wealth and the life cycle Eric Crampton, Offsetting Behaviour


  1. Singapore’s quarrel over colonialism Stephen Dziedzic, Interpreter
  2. Extreme economies: failure Joakim Book, NOL
  3. A victory over Sweden’s colonialism? Carl & Laiti, Al Jazeera
  4. The wrong models of democratic socialism Jacques Delacroix, NOL

Davies’ “Extreme Economies” – Part 2: Failure

In the previous part of this three-part review, I looked at Davies’ first subsection (“Survival”) where he ventured to some of the most secluded and extreme places of the world – a maximum security prison, a refugee camp, a tsunami disaster – and found thriving markets. Not in that pejorative and predatory way markets are usually denounced by their opponents, but in a cooperative, resilient and fascinating way.

In this second part, subtitled “The Economics of Lost Potential”, Davies brings us on a journey of extreme places where markets did not deliver this desirable escape from exceptionally restrictive circumstances.

There might be many reasons for why Extreme Economies has become a widely read and praised book. Beyond the vivid characters and fascinating environments described by Davies, this swinging between opposing perspectives is certainly one. Whether your priors are to oppose markets or to favour them, there is something here for you. Davies isn’t “judgy” or “preachy” and the story comes off as more balanced because of it.

If the previous section showed how markets flourish and solve problems even under the most strained conditions, this section shows how they don’t.

Darien, Panama

We first venture to the Darien Gap, the 160-kilometre dense rainforest that separates the northern and southern sections of the Pan-American Highway – an otherwise unbroken road from Alaska to the southern tip of Argentina.

To a student of financial history, “Darien” brings up William Paterson’s miserable Company of Scotland scheme in the 1690s; trying to make Scotland great (again?), the scheme raised a large share of scarce Scottish capital and spectacularly squandered it on trying to build a colony halfway around the world. In the first chapter of subsection ‘Failure’, Davies skilfully recounts the Darien Disaster, “Scotland’s greatest economic catastrophe” (p. 114).

Judging from Davies’ ventures into the jungle bordering Panama and Colombia, it wouldn’t be a far cry to call the present state of affairs a similar economic catastrophe. Rather than failed colonies, the failed potential of Darien lies elsewhere: its environmental challenges coupled with the trade and markets that failed to emerge despite readily available mutual gains for trade.

A stunning landscape of mile after mile filled with rainforests and rivers and the occasional lush farmland, the people of the Gap make a living through extracting what the land provides. If you’re deep into environmentalism, you might even say unsustainably so. Davies’ point is to illustrate a more well-known economic problem: when unowned or communally owned resources suffer from the tragedy of the commons – the tendency is for such resources to be overexploited and ultimately destroyed.

Whether through logging companies exceeding their quotas or locals chopping trees out of desperation to survive, the story in Darien is altogether conventional. At the edge of the Gap, “the people of Yaviza do what they can. [T]he environment is an asset, and for many people living in Yaviza getting by is only possible by chipping a bit off a selling it” (p. 120).

What’s striking here is that in times of need (as Davies himself showed in the chapter on Aceh) that’s exactly what we want assets to do! We can show this in down-to-earth, real-world examples like Acehnese women drawing on their jewellery as emergency savings, or in formal economic models such as the C-CAPM, the Consumption Capital Asset Pricing Model, familiar to every business and finance student.

On a much cruder level: if the mere survival of some of the poorest people on earth depend on chopping down precious trees – well, precious to far-away Westerners, anyway – accusing those people of destroying our shared environment is mind-blowingly daft. To rationalise that equation, you have to put a very large value on turtles and trees, and a very small value on human life.

Elinor Ostrom, whose Nobel Prize in economics was awarded to her work on common pool resources, emphasised three ways to solve tragedies of the commons: clear boundaries (i.e. individual property rights); regular communal meetings such that members can voice opinions and amicably resolve conflicts; a stable population so that reputation matters and we can socially police deviant behaviour (p. 125).

The Darien Gap has none of those. Property rights are routinely ignored; the forest includes many different populations (indigenous tribes, farmers, ex-FARC fugitives, illegal immigrants); and those populations fluctuate a lot, meaning that most interactions are one-shot games where reputation becomes useless. End result: extensive, illegal, unsustainable logging mixed with armed strangers.

What I can’t quite wrap my head around is that almost all (market and non-market) interactions that all of us have daily are with strangers: the barista, the people we walk past on the street, the new client you just met or the customer support agent you just talked to. All of them are strangers. A large share of interactions with other humans in the last few centuries of human societies have been one-offs, yet very few of them have spiral into the lawlessness that Davies describes in Darien. Be it the Leviathan, secure property rights, the doux commerce thesis or some wider institutional or cultural reason, but the failure of Darien to establish well-functioning formal and informal markets of the kind we saw in the book’s first part are intriguing.

While a fascinating chapter, it might also be Davies’ worst chapter, factually speaking. He claims, mistakenly, that “globally, deforestation continues apace with 2016 the worst year on record for tree loss”. On the contrary, we’re approaching global zero net deforestation. More specifically, Davies claims that Colombia and Panama are particularly at risk here, with rates deforestation “increased sharply”. A quick look through UN’s Global Forest Resource Assessment report (latest figures from 2015), these two countries are indeed chopping down their forests – but by less than any other time period on record.  Moreover, the Colombian net deforestation rate of 0.05% per year is easily exceeded by a number of countries; not even Panama’s dismal 0.3%/year (worse than the Brazilian Amazon) is particularly high in a global or historical perspective.

To make matters worse, the figure on p. 158 titled “The World’s Disappearing Tropics” might win an award for the most misleading graph of the year: by making the bars cumulative and downplaying the annual deforestation, it suggests that the forests are rapidly disappearing. The only comparison to relevant numbers (remember, Rosling teaches us to Always Be Comparing Our Numbers) is the tired “football pitches”. That’s hugely misleading. A vast amount of football pitches cleared in the Amazon this year still only amounted to 0.2% of the Brazilian Amazon; in other words, Brazilians could keep chopping down trees for a few good decades without making much of a dent to that vast rainforest.


Moreover, the only reference point we’re given is that over a period of almost twenty years, an area the size of France has been deforested – but that’s equivalent to no more than one-tenth of only the Amazon forest, and the tropics have many more forested areas than that. The graph aims to intimidate us with ever-rising bars signalling the loss of forests; with some proper numbers and further examination it doesn’t seem very bad at all. On the contrary, locals (and yes, international logging companies) use the assets that nature has endowed them with – what’s so wrong with that?

Finally, the “missing market” that Davies observes in the Gap involves countless of illegal immigrants from around the world that trek through the jungles in search of a better life in the U.S. We have cash-rich Indians, willing to pay people to guide them through unknown and dangerous terrain, and local tribes and farmers and ex-FARC members with such knowledge looking for income; setting up a trade between them ought to be elementary.

Instead, it’s not: “in this place of flux,” writes Davies, “reputation does not matter, interactions are one-offs” (p. 137). Overturning the market quip that “trading is cheaper than raiding”, in the Darien Gap raiding is cheaper than trading. One might of course object that the failures of rich countries to offer more liberal immigration rules for people willing to go this far to get there illegally is hardly a market failure – but a failure of government regulation and incompetent bureaucracies.

Kinshasa, Democratic Republic of the Congo (DRC)

A 12-million people city sprawled on the banks of the Congo river, so unknown to Westerners that most of us couldn’t place it on a map. Democratic Republic of the Congo, the country with more people in extreme poverty than any other, is frequently described as “rich”. Or, with Davies’ euphemism “unrivalled potential” (p. 143).

Congo, the argument goes, has “diamonds, tin and other rare metals, the world’s second-largest rainforest and a river whose flow is second only to the Amazon. [it] shares a time zone with Paris [and the] population is young and growing”. It is one of the poorest countries but “should be one of the richest” (p. 143).

No, no and no. Before any other consideration of the remarkable day-to-day trading and corruption that Davies’ interview subjects describe, this mistaken idea about wealth must be straightened out. Wealth isn’t what could be if this or that major obstacle wasn’t in the way (Am I secretly a great singer, if I could only overcome the pesky fact that I have a voice unsuited for singing and lack practice?). This is almost tautological; what we mean by a country being poor is that it cannot overcome obstacles to wealth.

All wealth has to be created; humanity’s default position is extreme poverty.

And natural resources do not equate to wealth – there is even more support suggesting the opposite – in which case Japan and Singapore ought to be poor and Venezuela and DRC rich. My own sassy musings are still largely correct:

As Mises taught us half a century ago – and Julian Simon more recently – wealth (or even ‘goods’ or ‘commodities’ or ‘services’) are not the physical existence of those objects somewhere in the ground, but the satisfaction and valuation derived by the human mind. The object itself is only a means to whatever end the actor has in mind. Therefore, a “resource” is not the physical oil in the ground or the tons of iron ore in the Australian outback, but the ability of Human Imagination and Ingenuity to use those for his or her goals. After all, before humans learned to harnish the beautiful power of oil into heat, combustion engines and industrial production, it was nothing but a slimy, goe-y liquid in the ground, annoying our farmers. Nothing about its physical appearance changed over the centuries, but the mental abilities and industrial knowledge of human beings to use it for our purposes did.

Still, “modern Kinshasa is a disaster everyone should know about” (p. 172). No country has done worse in terms of GDP/capita since the 1960s. And we don’t have to go far to figure out at least part of the reason: the first rule of Kinshasa, says one of Davies’ interviewees, is corruption (p. 145). Everyone “steals a little for themselves as the funds pass through their hands, and if you pay in at the bottom of the pyramid there are hundreds of low-level tax officials competing to claim your cash.” (p. 185). Mobutu, the country’s long-time dictator, apparently said “if you want to steal, steal a little in a nice way” (p. 159).

Whether small stallholders at gigantic market or supermarket-owning tycoons, workers or university professors, pop-up sellers or police officers, everyone in Kinshasa uses every opportunity they can to extract a little rent for themselves – out of desperation more than malice. And everyone hates it: “The Kinoise”, writes Davies, “understand that these things should not happen, but recognize that their city’s economy demands a more flexible moral code.” (p. 168).

Interestingly enough, DMC is not a country whose state capacity is insufficient; it’s not a “failed state”, an “absent or passive” government whose cities are filled with “decaying official buildings and unfilled civil-service positions.” (p. 148). On the contrary:

The government thrives, with boulevards lined with the offices of countless ministries thronged by thousands of functionaries at knocking-off time. The Congolese state is active but parasitic, a corruption superstructure that often works directly against the interests of its people.

Poorly-paid police officers set up arbitrary roadblocks and extract bribes. Teachers demand a little something before allowing their pupils to pass. Restaurant owners serve their best food to their civil service regulators, free of charge, to even stay in business. Consequently, despite an incredibly resilient and innovative populace, “these innovative strategies are ultimately economic distortion reflecting time spent inventing ways to avoid tax collectors, rather than driving passengers or selling to customers” (p. 162).

But, like the ingenious monetary system of Louisiana prisons, the most fascinating aspect of Kinshasa’s economy is its use of money. Arbitrage traders head across the river to Brazaville in neighbouring Republic of the Congo equipped with dollars which they swap for CFAthe currency of six central African countries, successfully pegged to the euro. With ‘cefa’ they buy goods at Brazaville prices, goods they bring back over the river and undercut exorbitant Kinshasa prices. Selling in volatile and unstable Congolese francs carries risk, so Kinshasa’s streets are littered with currency traders offering dollars – at bid-ask spreads of less than 2%, comparing favourably with well-established Western currency markets. Before most transactions, Kinoise stop by an exchange trader sitting outside restaurants or malls, to acquire some Congolese francs with which to pay. Almost, almost dollarisation.

In Kinshasa, people rely on illegal trading as a safety net when personal disaster strikes or the state’s required bribes become too extortionary. Davies’ point is a convincing one, that “a town, city or country can get stuck in a rut and stay there” (p. 174).

Judging from his venture into Kinshasa, it’s difficult to blame markets for that. I don’t believe I’m invoking a No True Scotsman fallacies by saying that a market whose participants spent half their time avoiding public officials and the other half bribing them to avoid arbitrarily made-up rules, is pretty far from a free market.

Believing the opposite is also silly – that markets and mutual gains from trade can overcome any obstacles placed before them. Governments, culture or institutions have power to completely eradicate the beneficial outcomes of markets – Kinshasa’s extreme poverty attests to that.

Glasgow, the last part of ‘Failure’, is discussed in a separate post.

Perspective and riches

Sometimes working in the arts can be quite disorienting, especially in terms of what comes out of the mouths of colleagues. For example, a close friend was in rehearsal and an ensemble member, having spent the first hour staring at her, suddenly demanded: 

“Are those real diamonds [pointing at a simple crystal strand bought at H&M]?” 

“What?! These?! No.”

“Oh, okay. I was trying to figure out how rich you are.” 

There were so many things wrong with this actual exchange that it is hard to know where to start. The main, collective reaction was: “Who openly admits to sitting there thinking things like that?” The episode embarrassed everyone except the person who asked the offensive question. Aside from the immediate disruptive effect it had, the incident was indicative of a greater socio-cultural problem, a shameless voyeurism that, while not new, has reached a fevered pitch today.

While one could easily say that reality TV and Instagram are primary causes, there are plenty of examples which predate these media, most memorably Gustave Flaubert’s Madame Bovary and its prescient view of tabloid and celebrity culture. What is new, though, is the idea that the envious and their curiosity have any legitimacy. We have come from Flaubert’s view that Emma Bovary was a colossal idiot to articles published by the BBC lamenting “invisible poverty.” The BBC writer’s examples of “invisible poverty” were an inability to afford “posh coffee,” a qualifier which he declined to define, and neighbors wondering if a “nice car” was bought on auto loan or owned outright. Like the question about diamonds, not only should such matters be outside the concern of others, to think that they are appropriate, or even a valid source of social strife, is disgusting and disturbing. 

In his book Down and Out in Paris and London, George Orwell complained about being sent to Eton, where he spent his school years feeling as though everyone around him had more material wealth. The essence of his lament was that he wished his parents had sent him to a small grammar school where he could have been the richest student. He also claimed, in a wild generalization, that his feelings on the matter were universal through the British upper-middle class. Further, he said that it was his time in secondary school, not as commonly claimed his time as a civil servant, which fueled his turn toward Marxism, following the traditional logic of grabbers – “they have so much and therefore can spare some for me.” 

The most baffling part for Orwell was the way that the upper-middle class, which included his family, was willing to move to far-flung corners of the globe and live in conditions the lowest British laborer would not accept in exchange for educational opportunity for their children and a high-status, reasonably wealthy retirement for themselves. For a comprehensive analysis of the phenomenon of self-sacrifice, its role in the development of capitalism, and why only the century upper- and upper-middle classes were the ones willing to make such exchanges, see Niall Ferguson’s Colossus

It is important today for us to become more critical regarding complaints about society and anecdotes that are presented as proof regarding unfair societal mechanisms that prevent social mobility. An example of the reason we must be careful is art recent article published by written by a Cambridge undergraduate for The Guardian, who identifying as working class and having many problems along those lines, cited as her biggest complaint the Cambridge Winter Ball. Her problem was not that she hasn’t been able to attend, but that she had had to work for an hour in order to get into the Ball for free. This is a questionable example of social immobility. Her complaint about the Ball was that there were others who could pay the £100 entrance fee upfront. From this, she assumed a level of privilege that might not necessarily exist, i.e. “the other students could part with 100 pounds.” 

Another example of failure to understand the availability of resources and extrapolating a false conclusion of social immobility is the Columbia University FLiP (First-generation, Low-income People) Facebook page, which was, through 2018, their primary platform. In response to Columbia University’s study on their first-generation low-income population, many of the complaints related to books and the libraries. FLiP students didn’t know that books were available in the library, and so they had purchased study materials while their “wealthier” peers simply borrowed the library copy or spent the necessary number of hours in the library working. Ironically, this complaint is not valid if you also consider that Columbia does an immersive orientation in which new students are taken into the libraries and are shown the basics of the book search system, card operations, checkout procedure, etc. In response to the publicity surround the FLiP drive[1] the university opened a special library for these people where there is no official checkout; all loans are on the honor system. On a hilarious side note, in the middle ages libraries would chain books to lecterns to keep the students from walking away with them.

While we may have moved away from a society that encouraged living modestly to avoid arousing the envy of one’s neighbors, we now live in a culture in which our neighbors’ jealousy is too easily aroused. Chaos is the natural resting state of existence, but people have lost the ability to construct order for themselves out of it. It is possible to argue that modern people have not been taught to do so; after all, no one comes into the world knowing the underlying skills that are the foundation of the “invisible poor” complaints, e.g. social interactions, sartorial taste, self-sacrifice, etc. To tell the truth, mankind’s natural state is closer to the savages of the middle ages whose covetous inclinations necessitated the chaining of library books. On the one hand, we have progressed tremendously past such behavior and in doing so created order from chaos; but on the other hand, the external signs of progress are now under fire as symbols of privilege. Chillingly, the anti-civilization narrative, because that is ultimately what it is, is being incorporated into an anti-capitalist agenda through the conflation of “civilized” with “privileged,” which in turn is conflated with “rich.” 

[1] It is also revealing that the sign off for these people while the drive lasted was FLiP [school name]. Yes, one must wonder if even the acronym was picked for its stunning vulgarity. 

Economists vs. The Public

Economics is the dismal science, as Thomas Carlyle infamously said, reprising John Stuart Mill for defending the abolishment of slavery in the British Empire. But if being a “dismal science” includes respecting individual rights and standing up for early ideas of subjective, revealed, preferences – sign me up! Indeed, British economist Diane Coyle wisely pointed out that we should probably wear the charge as a badge of honor.

Non-economists, quite wrongly, attack economics for considering itself the “Queen of the Social Science”, firing up slurs, insults and contours: Economism, economic imperialism, heartless money-grabbers. Instead, I posit, one of our great contributions to mankind lies in clarity and, quoting Joseph Persky “an acute sensitivity to budget constraints and opportunity costs.”

Now, clarity requires one to be specific. To clearly define the terms of use, and refrain from the vague generality of unmeasurable and undefinable concepts so common among the subjects over whom economics is the queen. When economists do their best to be specific, they sometimes use terms that also have a colloquial meaning, seriously confusing the layman while remaining perfectly clear for those of us who “speak the language”. I realize the irony here, and therefore attempt my best to straighten out some of these things, giving the examples of 1) money and 2) investments.

An age-old way to see this mismatch is measuring the beliefs held by the vast majority of economists and the general public (Browsing the Chicago IGM surveys gives some examples of this). Bryan Caplan illustrates this very well in his 2006 book The Myth of the Rational Voter:

Noneconomists and economists appear to systematically disagree on an array of topics. The SAEE [“Survey of Americans and Economists on the Economy”] shows that they do. Economists appear to base their beliefs on logic and evidence. The SAEE rules out the competing theories that economists primarily rationalize their self-interest or political ideology. Economists appear to know more about economics than the public. (p. 83)

Harvard Professor Greg Mankiw lists some well-known positions where the beliefs of economists and laymen diverge significantly (rent control, tariffs, agricultural subsidies and minimum wages). The case I, Mankiw, Caplan and pretty much any economist would make is one of appeal to authority: if people who spent their lives studying something overwelmingly agree on the consequences of a certain position within their area of expertise (tariffs, minimum wage, subsidies etc) and in stark opposition to people who at best read a few newspapers now and again, you may wanna go with the learned folk. Just sayin’.

Caplan even humorously compared the ‘appeal to authority’ of other professions to economists:

In principle, experts could be mistaken instead of the public. But if mathematicians, logicians, or statisticians say the public is wrong, who would dream of “blaming the experts”? Economists get a lot less respect. (p. 53)

Money, Wealth, Income

The average public confusingly uses all of these terms interchangeably. A rich person has ‘money’, and being rich is either a reference to income or to wealth, or sometimes both – sometimes even in the same sentence. Economists, being specialists, should naturally have a more precise and clear meaning attached to these words. For us Income refers to a flow of purchasing power over a certain period (=wage, interest payments), whereas Wealth is a stock of assets or “fixed” purchasing power; my monthly salary is income whereas the ownership of my house is wealth (the confusion here may be attributable to the fact that prices of wealth  shares, house prices etc  can and often do change over short periods of time, and that people who specialize in trading assets can thereby create income for themselves).

‘Money’, which to the average public means either wealth or income, is to the economist simply the metric we use, the medium of exchange, the physical/digital object we pass forth and back in order to clear transactions; representing the unit of account, the thing in which we calculate money (=dollars). That little green-ish piece of paper we instantly think of as ‘money’. To illustrate the difference: As a poor student, I may currently have very little income and even negative wealth, but I still possess money with which I pay my rent and groceries. In the same way, Bill Gates with massive amounts of wealth can lack ‘money’, simply meaning that he would need to stop by the ATM.


A lot like money, the practice of calling everything an ‘investment’ is annoying to most economists: the misuse drives us nuts! We’re commonly told that some durable consumption good was an investment, simply because I use it often; I’ve had major disagreements friends over the investment or consumption status of a) cars, b) houses, c) clothes, and d) every other object under the sun. Much like ‘money’, ‘investment’ to the general public seem to mean anything that gives you some form of benefit or pleasure. Or it may more narrowly mean buying financial assets (stocks, shares, derivatives…). For economists, it means something much more specific. Investopedia brilliantly explains it: The definition has two components; first, it generates an income (or is hoped to appreciate in value); secondly, it is not consumed today but used to create wealth:

An investment is an asset or item that is purchased with the hope that it will generate income or will appreciate in the future. In an economic sense, an investment is the purchase of goods that are not consumed today but are used in the future to create wealth.

This definition clearly shows why clothes, yoga mats and cars are not investments; they are clearly consumption goods that, although giving us lots of joy and benefits, generates zero income, won’t appreciate and is gradually worn out (i.e. consumed). Almost as clearly, houses (bought to live in) aren’t investments (newsflash a decade after the financial crisis); they generate no income for the occupants (but lots of costs!) and deteriorates over time as they are consumed. The only confusing element here is the appreciation in value, which is an abnormal feature of the last say four decades: the general trend in history has been that housing prices move with price inflation, i.e. don’t lose value other than through deterioration. In fact, Adam Smith said the very same thing about housing as an investment:

A dwelling-house, as such, contributed nothing to the revenue of its inhabitant; and though it is no doubt extremely useful to him, it is as his cloaths and household furniture are useful to him, which however make a part of his expence, and not his revenue. (AS, Wealth of Nations, II.1.12)

Cars are even worse, depreciating significantly the minute you leave the parking lot of the dealership. Where the Investopedia definition above comes up short is for business investments; when my local bakery purchases a new oven, it passes the first criteria (generates incomes, in terms of bread I can sell), but not the second, since it is generally consumed today. Some other tricky example are cases where political interests attempt to capture the persuasive language of economists for their own purposes: that we need to invest in our future, either meaning non-fossil fuel energy production, health care or some form of publicly-funded education. It is much less clear that these are investments, since they seldom generate an income and are more like extremely durable consumption goods (if they do classify on some kind of societal level, they seem like very bad ones).

In summary, economists think of investments as something yielding monetary returns in one way or another. Either directly like interest paid on bonds or deposits (or dividends on stocks) or like companies transforming inputs into revenue-generating output. It is, however, clear that most things the public refer to as investments (cars, clothes, houses) are very far from the economists’ understanding.

Economists and the general public often don’t see eye-to-eye. But improving the communication between the two should hopefully allow them to – indeed, the clarity with which we do so is our claim to fame in the first place.

Revised version of blog post originally published in Nov 2016 on Life of an Econ Student as a reflection on Establishment-General Public Divide.