Democracy and Money

Lessons for Today from Athens in Classical Times

George C. Bitros, Emmanouil M. L. Economou, Nicholas C. Kyriazis

• Publisher: Routledge
• Year: 2020
• ISBN:
  9781000097122
• Edition: 1
• Topic: Economics
• Subtopic: Economic History
• Index: Economics

The authors of this book argue that post-war fiscal and monetary policies in the U.S. are prone to more frequent and more destabilizing domestic and international financial crises. So, in the aftermath of the one that erupted in 2008, they propose that now we are sleepwalking into another, which under the prevailing institutional circumstances could develop into a worldwide financial Armageddon.

Thinking ahead of such a calamity, this book presents for the first time a model of democratic governance with privately produced money based on the case of Athens in Classical times, and explains why, if it is conceived as a benchmark for reference and adaptation, it may provide an effective way out from the dreadful predicament that state managed fiat money holds for the stability of Western-type democracies and the international financial system.

As the U.S. today, Athens at that time reached the apex of its military, economic, political, cultural, and scientific influence in the world. But Athens triumphed through different approaches to democracy and fundamentally different fiscal and monetary policies than the U.S. Thus the readers will have the opportunity to learn about these differences and appreciate the potential they offer for confronting the challenges contemporary democracies face under the leadership of the U.S.

The book will find audiences among academics, university students, and researchers across a wide range of fields and subfields, as well as legislators, fiscal and monetary policy makers, and economic and financial consultants.

1 Introduction

Unlike the Athenian democracy, which functioned by direct participation of its adult male citizens in the state’s decision-making process, all democracies established in more recent centuries have been erected upon the principle of representation. Drawing on it, the citizens as principals assign to elected officials as representatives or agents the authority to legislate and govern. If the elected officials could be held strictly responsible for honoring the terms of an explicit contract with the citizens, the relationship of representation would not be problematic. But this is not the case. Because in theory and in practice, the authorization to legislate and govern has been construed to mean that after the officials are elected, they are free to decide on the various issues of the state. To see the problem that arises, let them be free until the following elections.

Since the latter are held normally several years later, the citizens may be safely presumed to have little or no memory of what they were promised in the previous elections, and hence the elected officials become de facto able to pursue with relative impunity their own self-serving interests instead of those of the citizens. That this proposition is the rule rather than the exception is corroborated by numerous old and new sources. For an early one, consider the following testimony from the autobiography of the great politician and philosopher Franklin (2005, 87).

Few in public affairs act from a meer view of the good of their country, whatever they may pretend; and, tho’ their actings bring real good to their country, yet men primarily considered that their own and their country’s interest was united, and did not act from a principle of benevolence.

As for another more recent, it suffices to mention that a wholly new field in economics, that is, Public Choice Theory, has been developed for the expressed purpose of explaining the behavior of elected officials and devising mechanisms to maintain democratic control over the ways they use the power entrusted to them by citizens.

Bitros, Karayiannis (2013) assessed the two models of democracy and found that because of the above inherent weakness, representative democracies are prone to developing serious distortions, some of which are accompanied by high risks of becoming degenerative. Such a grievous one on the political side is, for example, the advancing erosion in the representativeness of governments. The constitution and the related laws and ordinances set out when and how elections are announced, how they are conducted, who participate as candidates and who make up the constituency, and how the winners are nominated. Yet in many democracies where two political parties often alternate in government, either through implicit or explicit agreements, they introduce changes for the purpose of perpetuating their hold on power. As a result, the case is rather common that governments hold majorities in the parliaments, despite receiving less than half of the votes of the electorates, thus enabling them to vote for laws opposed by most of the population. Moreover, governments that are elected by nonproportional electoral systems justify doubts about their representativeness, thereby leading citizens to perceive their decisions as illegitimate, and to resort to behaviors that aim to annul the results intended by the laws.

The list of distortions in public governance is long. However, here we are interested in the domain of the economy, and upon turning to it, two very worrisome trends stand out. These are first, the persistence of deficit spending along with the accumulation of huge public debts, and, second, the loss of control of the money supply by monetary authorities, particularly in large reserve currency countries. Our plan is to explain briefly in this introductory chapter why these trends are unsustainable and why it is absolutely urgent to confront them ahead of the next big crisis; then, to make a digression to find out what we can learn about these issues from Athens in classical times; and finally, drawing guidance from our findings, to return in the concluding chapter to highlight the question of how it would be advisable for contemporary democracies to go about the tasks for reversing these trends.

1.1 Deficits and debts in contemporary democracies

Up to the 1929 economic crisis, democratically elected governments applied fiscal policies under Adam Smith’s dictum that “what is prudence in the conduct of every private family can scarce be folly in that of a great kingdom.” To alleviate short spells of unemployment, they resorted to deficit spending mainly to finance infrastructures and found it imperative to balance them out later in the upturn of the business cycle. So, no public debts accumulated. But, when the crisis erupted, the recession that followed was so deep and protracted that it shook the confidence of people in the free market economy and rendered the millions of ordinary people who lost their livelihood receptive to government measures that offered even the faintest ray of hope. Thus, although now we know that this calamity was instigated and exacerbated in the United States by failures of the Fed, the change in the economic and social climate enabled politicians to depart from the prevailing fiscal orthodoxy and to implement policies that allowed the state to intervene deeply into the private economy.

In the following three decades, for reasons that trace back to the principal-agent problem outlined above, governments widened gradually the range of deficit spending to include an ever-expanding list of consumption expenditures, and hence public debts started to pile up at increasing rates. Perhaps to absolve himself from all responsibility in case the proposals he put forward in 1936 were abused, shortly thereafter Keynes (1942, 277–278) came back to state that:

I should aim at having a surplus on the ordinary budget, which would be transferred to the capital budget, thus gradually replacing dead-weight debt by productive or semi-productive debt …. But I should not aim at attempting to compensate cyclical fluctuations by means of the ordinary budget. I should leave this duty to the capital budget.

However, his precaution proved needless. Because the genie that Keynes (1936) thought he had closed firmly in the bottle of his general theory escaped as the interpreters of his propositions, collectively called Keynesians,¹ set the course of developments in the direction so accurately noted in the following excerpt from Hayek (1960, 304–305):

…democracy will have to learn that it must pay for its own follies and that it cannot draw unlimited checks on the future to solve its present problems. It has been well said that, while we used to suffer from social evils, we now suffer from the remedies for them. The difference is that, while in former times the social evils were gradually disappearing with the growth of wealth, the remedies we have introduced are beginning to threaten the continuance of that growth of wealth on which all future improvement depends.

Thus, by the time Buchanan, Wagner (1977) were writing, democracy in deficit had been established already as the new normal. Entitlements kept increasing at unsustainable real rates of growth; servicing of the unproductive public debts absorbed ever-increasing chunks of Gross Domestic Product (GDP), along with aggravating income inequality; the United States turned from creditor to debtor country, thereby eroding the value of the U.S. dollar as the preeminent currency of the world; with few exceptions, public sectors expanded everywhere by crowding out the more productive private sector and limiting its share to around 50% of GDP; and last, but not least, regulatory arrangements designed to keep the markets open to actual and potential competition have become themselves part of the problem rather than the solution by failing repeatedly to perform effectively according to expectations.

1 Despite Keynes’s admonitions to the contrary, under the influence of Keynesians, democracies got addicted to deficit spending as if future generations would be wealthy enough to weather the deadweight from the accumulated debt. Even worse, democracies are called now to get accustomed to a new fad by the name of New Monetary Economics, which is no more than a new toxic form of statism bound to erode further democracy and individual freedoms through heavy taxation of fiat money by means of negative interest rates. Instead, in this study, we stand by the wisdom of the so-called balanced budget doctrine by drawing on the fiscal policies that Athens applied in classical times and centuries later democracies adopted as the preferred normal until 1929.

Where are we now and what are the risks looming ahead? Owing to the almost miraculous combination of inventiveness with entrepreneurship, the fears that this wealth producing engine may stall under the burdensome profligacy of democratic governments have not materialized, at least not yet.² Fortunately, wealth continues to grow and as a matter of fact to benefit countries which had remained behind in the past. But the underlying trends are very worrisome because public debts continue for several decades now to increase faster than wealth. To highl...

Table of contents

• Cover
• Half Title
• Series Page
• Title Page
• Copyright Page
• Dedication
• Table of Contents
• List of exhibits
• List of figures
• List of tables
• Preface
• 1 Introduction
• 2 Money-related institutions in classical Athens
• 3 The system and the tenets of public finance
• 4 Main currency-related policies
• 5 Structure and evolution of the economy
• 6 Money in an economy without a central bank
• 7 An assessment of comparative performance
• 8 Alternatives to common central banking
• 9 Why back and how to direct democracy
• References
• Glossary of Greek Terms
• Index