The new economic context created by the Industrial Revolution, and the abandonment of the gold standard as the benchmark for the production of money, offers a number of possibilities that have yet to be fully developed, because economic leaders have failed to recognize all the opportunities presented by this new economic environment.

One of the fundamental features of the current economic model, which I refer to here as the "abundance model", is that there are no limits on the production of wealth, which means that there should likewise be no limits on job creation and, consequently, the elimination of poverty. Poverty has always been and continues to be a product of what I call the "economy of scarcity", as I will explain below.

Until relatively recently (and in fact, in many parts of the world it is still the case), the economy was based on a notion of insufficiency. Gold, which was used as the monetary standard, tied the solvency and value of the economy to this insufficiency. And the same was true of farming and mining, which were the main sources of wealth until quite recently. As a consequence of this limited wealth production, labor was also obviously a limited resource.

This economy of scarcity has been what has governed human history since the Stone Age. Indeed, the objective of most wars has been to seize the resources of another tribe or nation. This limited system of scarcity was also behind nearly all the economic crises of the past.

The last great traumatic manifestation of this was the Wall Street Crash of 1929, which precipitated the Great Depression. While the stock market crash was really very important, what paralyzed the economy and led to a prolonged worldwide depression was the drying up of demand that resulted from the erroneous economic measures taken by the US government at the time.

The US Federal Reserve itself helped to unleash the Great Depression because it acted on the premise of scarcity after the stock market collapse by restricting the flow of cash. This stifled the demand for goods because people didn’t have money to buy them, which in turn triggered a rise in unemployment. The price paid around the world for this mistake was huge, and it even had a big influence on the outbreak of World War II, since the increased hardship it brought about paved the way for the rise to power of a populist lunatic like Hitler.

It is obvious that the political leaders and their advisors were acting in accordance with the dictates of the economy of scarcity, and this is why it never occurred to them that they should have done exactly the opposite of what they did. In other words, instead of restricting cash, they should have flooded the market with it, at low cost, in order to stimulate demand, which in turn would boost production and employment. But the reality was that the economic leaders never thought of such a possibility. The only solution they saw was huge investments by the federal government, an approach that is never effective because it increases taxes and public debt, and as a result, in the medium term, leaves even less money in the hands of individuals and businesses, reducing demand and increasing unemployment even more. Even today some economists still praise the policy of big investments adopted by the Roosevelt administration, crediting it with the end of the Great Depression. This is totally erroneous. The end of the crisis, as ghastly as it may seem, was brought about by the huge demand for all kinds of goods generated by World War II, stimulating industry in the United States, which became the factory of the world.

However, it was actually some time earlier that the first step was taken toward the end of the economic model of scarcity. This step was the success of the Industrial Revolution, although at the time nobody was aware of the fact. It was at this time that consumer goods began being mass produced, goods that could only be sold if there were a lot of people with purchasing power, which meant that more people needed ready money. But this first step did not dismantle the system of scarcity altogether, as in those days money continued to be a limited resource. Nevertheless, it was a first step.

For a while, this evolved system of industrial production coexisted with the traditional monetary system, which was still stuck in the same old straitjacket of the gold standard for its production. As a result, goods were produced in huge quantities, but the number of people with enough money to buy them did not grow at the same rate.

This of course resulted in severe tensions that economists could not foresee, much less explain or resolve effectively. It was also at this time that people like Karl Marx would cause considerable damage to mankind with their theories, which were the product of sheer ignorance, as they completely failed to grasp what this new age meant and the possibilities that it opened up both for employers and for workers. These misguided theories were adopted by many people around the world (indeed, some still espouse them today), resulting in all kinds of suffering and social ills, including the Cold War.

It would thus not be until quite late in the last century (1971) that the new economy would finally be born, as the product of the definitive elimination of gold as the monetary standard in each country.

From that time on, the standard used would be the country’s gross domestic product (GDP) and a series of other variables such as working capital needs, inflation, etc. The brilliance of this new system is that there are no longer any limits on the production of money than the ingenuity of a country’s citizens to create wealth.

As a result, once the two elements of the Industrial Revolution and the elimination of the gold standard were combined, the current model of the economy of abundance came into being.

However, we have moved from the old economic model of scarcity to the new model of abundance almost without realizing it. This is why the possibilities and dimensions of the new model have yet to be fully understood and exploited by our economic leaders and governments. This lack of understanding has given rise to the economic crises that so frequently afflict us, including the crisis of 2008.

As I have explained in one of my previous essays, the key to the successful operation of this economic model lies in the vitality of our society to create a demand for goods and services in a natural and organized way, as this is what creates the employment needed to meet that demand, which in turn gives rise to more natural demand, and so on. This cycle is what should soon bring an end to miserliness, and shortly thereafter to poverty.

However, it is important to note that the economy of abundance is being implemented around the world in a highly irregular manner. In Africa, for example, there is no sign of it, as the economy of scarcity continues to prevail. Its economy is very primitive, tribal and lacking in organization. In most Latin American countries, the implications of the new scenario have not been properly grasped either, as they have only just begun learning how to implement it. Many other countries, such as India or Russia, have yet to develop it very effectively. In all these cases, the new model will be implemented actively when its leaders have a proper understanding of it, as only then will they recognize the possibilities it offers their citizens and the governments themselves, which will be able to collect more taxes as the GDP rises.

In Western Europe, this economic model of abundance is being fully applied, although the activity of their bloated, interventionist governments undermines its effects, resulting in chronically high unemployment levels on the Old Continent. By keeping taxes excessively high, governments are siphoning money out of the market and reducing the purchasing power of their citizens, resulting in a reduction in demand as well. This in turn increases unemployment.

In China, the new model is being implemented effectively, with the peculiarity that a single party holds all political power. This ensures a very positive level of stability today, but promises upheavals in the future when the new generations of the bourgeoisie and middle class demand a share of that power. We must hope that intelligence prevails and the transition is smooth and balanced.

In the United States, this economic model has been fully implemented, and as government intervention is limited it doesn’t suffer from the unemployment problem that afflicts Europe.

The United States, which is the country with the biggest share of the global economy, is a special case because its population is made up of a mixture of races and cultures whose interbreeding enriches the country, resulting in a dynamic and creative society that is the product of natural selection, resulting from the fact that many of the most energetic individuals from other countries have immigrated to this country.

These characteristics, along with its principle of freedom, facilitate wildly imaginative initiatives resulting in the creation of profuse and widespread wealth that translates into millions of jobs and a strong middle class. But this creative imagination when applied to the financial sector has at times led to excesses, with some peculiar outcomes that pose significant risks. Thus, the occasional economic problems suffered in this country are generally the product of misguided actions on the part of its financial sector, which also affect the rest of the world.

It is undeniable that the financial sector is extremely useful to society because it serves as a channel for the flow of cash, but it is for this very reason that turmoil in this sector, with its decisive influence on the economy as a whole, can sometimes have catastrophic consequences. This is why it should be a key role of governments especially to regulate and control this sector in order to prevent the damaging effects of such excesses, as occurred in 2008.

The United States should lead the way in this regulation, which could begin by re-establishing clearly defined boundaries between commercial and investment banking.

Commercial banks should continue to have the backing of the central banks (as they have always done) to guarantee deposits and provide them with liquid assets when necessary. This banking sector should provide the market with secured loans, taking care that such loans never exceed the value (or useful life) of the asset for which the loan is granted. The sector should be prohibited from participating in high-risk transactions, such as the purchase of "derivatives", as these are generally nothing more than a mix of different financial products with different degrees of vulnerability, which are bought and sold frenetically with big risks, because buyers almost never know what it really is they are buying. No such transactions should be on the books of commercial banks because they pose a danger to the reliability of the system. The profits of these institutions will of course always be moderate, but as they do not participate in high-risk transactions they will be very stable.

In the case of investment banks or similar institutions, what is most urgently needed is for users and customers to be clearly aware (and this should also be the job of the government) that unlike commercial banks they are not protected by the central bank, and that although with imagination and luck investors may earn large sums of money with such banks, they must also be aware that they could lose everything, because neither taxpayers’ money nor the commercial banks (which should not be involved in the investment sector) will come to their rescue if difficulties arise.

It is also important to learn from recent history and to correct mistakes where necessary, because crises like the one in 2008 have demonstrated that the risk insurance that investment banks purchased through insurers was a mere fiction. This operates as follows: the financial institution makes a purchase, for example, of a large package of mortgages from another institution. It then insures against potential losses or defaults through an insurance company, and thereby theoretically eliminates the risk from its balance sheets, allowing it to seek new loans secured by the insurance and continue investing. This in reality is no more than an accounting sleight of hand that conceals the danger; in reality, the risk is still there, because when the borrowers default the insurers are unable to cover them as the costs are too great. The defaults thus end up affecting the financial institution, which suddenly has losses on its books, and this in turn causes panic among its creditors and depositors, who perceive a threat to the savings they have invested with the company and rush in a stampede to try to withdraw as much as they can.

The social role of financial institutions and the banking sector is to channel credit and savings in a stable and efficient manner. But to be able to apply the economy of abundance with all its potential for development, the dangers posed by the financial sector outlined above need to be corrected as quickly as possible in the interests of protecting us from future global crises.

Another area for improvement relates to a lack of global homogeneity. Currently, each country applies its own criteria to the accounting control systems of major companies listed on the stock exchange. The globalized context in which money moves around makes it advisable for the measurement and control methods used by these companies to be the same everywhere, but this is not happening. This abnormality poses additional risks, as I will explain below.

In the US accounting system, the financial assets of American companies must be updated daily, or at least monthly, to reflect increases and decreases on their books that translate into profits and losses.

In Europe, most countries do not operate this way. The companies listed on the stock market only adjust the value of their assets on their books when they unload them. Thus, when difficulties are foreseen due to a drop in value of such assets, the company’s directors will determine not to sell them in order to avoid the appearance of losses on their balance sheets.

Clearly, the US accounting system is more transparent, but the European system is more secure in that it prevents major shocks, as its accounting method keeps companies from having to speak of losses (which always has a potential for causing panic among investors), resorting instead to euphemisms like "cash shortage", "liquidity problems", etc.

In any case, one or the other method should be agreed by the governments or the world’s major economies, adopting a single global accounting system for any company listed on the stock exchange, especially those operating in the financial sector. The economic authorities of every country need to acknowledge once and for all that the financial sector is globalized, and therefore needs global rules to minimize risks.

Another worthwhile step would be to return the stock market to its original role of financing new projects and maintaining existing ones, and reducing the predominance of "short-termists", who sometimes take big risks (and obtain big profits) that can even push companies into bankruptcy. This should be regulated and controlled by agreements between governments and the financial sector, in order to prevent these highly destabilizing practices of the virtual economy.

There are many other steps to take, but one of the most important for preventing future risks is to introduce instruction in the basic elements of economics in schools so that young people have a better understanding of this subject, as it will affect them their whole lives.

In conclusion, we are living in an exciting age, the age of the economy of abundance. If we are able to predict and correct the risks it poses, we may find ourselves in the first era of human history in which poverty is no longer an insoluble problem, as it can be solved with the possibilities that this economic model offers for the creation of hundreds of millions of jobs around the world, once all nations learn how to apply it and abandon the practices and mentalities, still prevailing in many places, of the economy of scarcity.

Víctor Saltero , 2017

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