I felt it worth sharing more widely this comment made on the blog by Adam Sawyer yesterday. It resulted from the discussion on rebranding economics:
The fundamental reason people cling to the household analogy is because for individual players in the game that is the economy it is familiar and it is true enough at their level of the game.
Understanding the reality of money requires individual players to adopt a different perspective: that of the referees or rule setters for the game.
Problem is the average person has zero experience of (and little time or capacity to imagine) this alternative perspective. Furthermore asking Joe Public to reconsider the nature of money is expecting them to revisit a question to which they are certain they already know the answer. Why should they waste their time on such a fruitless exercise?
Reframing the debate requires that we shift from the micro to the macro frame. Getting people to do that mental processing requires we give them good cause to do so.
To my mind this boils down to two broad approaches to raising people's consciousness:
1) Asking people simple questions like “where do pounds sterling come from?”, “What is the purpose of money?”, “How would you operate im a world without money?”, “What gives money its value?”. This triggers an awareness that they don't fully understand money and may motivate them to think further.
2) Identifying familiar microeconomic phenomena which jar with the common-sense view about money as a commodity OR as part of a flawless system. Economic depressions are the obvious example — like I said in an earlier post: you have to down tools and abandon your home for NO REAL REASON! This is both surprising and motivational. The fact no-one is ever told they cannot access their deposit account because the money has been lent put us another. The seeming inexplicable circularity of the promise to pay on our currency is another.
I would hazard a guess that there is a second big stumbling block for nuanced understandings of complex realities beyond the fact most already think their simplistic understanding is sufficient. That is that complex abstract ideas are frequently beyond the average cognitive capacity for our population. This is obviously a controversial and unsettling statement but that doesn't prove it to be false.
If true it means anyone trying to convince the masses of a “complex and counterintuitive truth” faces a terrible uphill battle if others are trying to convince the masses of a contradictory “simple and obvious truth”. This certainly seems consistent with our experience of “selling MMT”.
Here we run into the Dunning Kruger effect. Those currently without the capacity to understand DO NOT REALISE they do not have the capacity to understand. Further they will become insulted and actively hostile if we suggest they do not understand something they really truly believe they do already get. To make it even harder for us money is inextricably wrapped with social status and so any implication that someone doesn't understand money is more insulting than say the suggestion they don't understand photosynthesis.
A second failure of comprehension presents a major stumbling block for us. This is people's blindness to history and to the gradual process of change. People cannot comprehend the modern world because it is too vast, too complex and too complicated. However, neither can they look back to a simpler past and use that as any guide because:
a) they are largely unaware of the realities of the past and
b) even when they are familiar with SOME aspects of life in the past they tend to project modern ideas and technologies back onto the imagined past.
This is best exemplified by the simplistic and entirely erroneous mainstream economics view of the evolution of money:
Barter => Commodity Money => Credit Money
A dim awareness of this among the masses causes people to believe things like “the gold standard is the older, safer more tried and tested way of doing things”. Witness Positive Money's success in motivating people to get behind the idea of making banks operate how they intuitively think banks should operate. I believe they're successful in part because they rely on an appeal to familiarity but also in an appeal to concepts of what's old and true and tested.
The fact that in reality money is and always has been debts and credits (IOUs) escapes most people and makes us mistakenly believe modern banking is something wholly new, unreliable and uncontrollable. Truth is it is merely the logical extension of personal credit relations that are likely as old as our species.
Therefore I like to cut out all the modern complexities and ask people to consider how a neolithic village at the dawn of the agricultural age would be able to organise themselves. I like to reference the well researched Dunbar number as backup to a model of small human societies where everyone is known to everyone else and therefore personal credit systems can operate based entirely on personal trust without any need for trusted third parties (banks or states).
I think it is only possible to break through the household analogy by getting normal people to consider a simple system that they are capable of understanding quickly. From that point of common understanding it is possible to build up a nuanced understanding of our modern money system. I believe going into it from higher levels leaves lay-audiences in a state of confusion and lacking the intuitive understanding required to easily grasp the reality of our modern system.
I know this because I struggled immensely myself till I imagined the simplest of societies and how they might operate. Reading David Graeber's book Debt the First 5,000 Years helps too.
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I agree hence maths is taught simple sums, harder sums and then difficult sums. I feel that all folk can manage the concepts described above. The pedagogue model is well tested. My contribution find value free language I suggest that ‘masses’ is not.
Dennis,
I take your point about value free language. It certainly is counterproductive to insult people’s intelligent or be patronising.
In my defense I am one of the “masses” myself. I’m not economically trained, have no relevant qualifications and it’s my own slow and painful experience of learning MMT that informs everything I said above.
On the pedagogy of maths analogy – yes I agree most, like me, are capable of understanding at least the broad brush-strokes of MMT just as most are capable of achieving basic levels of numeracy. The difference is that maths teachers aren’t asked to teach an erroneous curriculum nor forced to compete against “experts” in the media telling their pupils that 2 + 2 = 5 😉
Actually, 2 + 2 does = 5
Round 2.49 to the nearest whoe number and it is 2
Do it again
Then add up the actual value of the numbers
Round to the nearest whole number
The answer is 5
No problem at all
Spreadsheets do this all the time
I agree that 2+2 = 5 for many accountants.
Coming from a background in mathematics nothing annoyed me more than accountants doing our audits. They would look at the accounts we had already prepared which were accurate to the penny and then round everything to the pound. After that they had to spend their time messing around fiddling with the figures and adding a random pound somewhere to make sure the balance sheet actually balanced because of the errors they had deliberately introduced.
Oh yes
And then they round to thousands
And millions
And dammit, the government does billions
But they then just admit that the rounded figures do not add up
The issues of trying to get people to go beyond the ‘received wisdom’ of the household analogy as well as other significant issues (such as ‘Why as a public sector employee do you still continue to vote Tory?’) is what got me well and truly mixed up with the logic concepts of induction and deduction in a previous post.
To me, people are inducted into these inaccurate beliefs such as the ‘household analogy’ in much the same way as you go into an induction process for a job. We are constantly inducted into neo-lib and other faulty economic thinking via the media as well crappy economics courses at Universities that just regurgitate orthodox stupidity.
This is what I meant by induction – which is just a process of putting forward or delivering information (in this case) bad economic information and false knowledge – without question or debate for it to be taken as a truth by those receiving it.
What I have always hoped for (and still do) is to witness Pablo Friere’s idea of the population growing a ‘critical consciousness’ (as opposed to the present naive consciousness) about these ideas and finding out for themselves what is going on and then questions and demanding something different. Hopefully (as has been politely pointed out to me) via using inductive thought processes.
I have to agree with the post above however and say that my hopes are very realistic: I constantly see people here at work who have no appetite for discussing these issues. They have given up and feel that they cannot do anything about it. And if you try to raise it (no matter how nicely) you are called ‘too political’ or asked to be quiet as you make people feel uncomfortable because it is just too difficult for them to discuss.
This reluctance to explore what is actually going on is what I would call the tyranny of the oppressed.
In more middle class ‘polite society’ circles I find nothing but ignorance of where money actually comes from, from people who have even been to our top universities, earn more than me and really should know better. But this is also a group who chase and purchase really expensive housing and get into high debt and consider these to be virtues that elevate them above others! You could look at the ‘precariat’ and understand why they might be led astray. But those who have been to Uni and have been apparently taught to think have no excuse in my mind.
This resistance to exploring these issues amongst the educated is the tyranny of the ignorant/ or ‘contented’.
It really is very difficult. This is why in many ways I want BREXIT to go forward – if only to see if the ensuing economic melee would promote a more critical consciousness as a result. I mean – what does it take for people to wake up?
I just do not have the answer.
The masochists argument for Brexit….
No – Richard – not masochism – empiricism – when the countervailing ignorance and dim-wittedness is so overwhelming, how else can we change that point of view but by the analysis/reflection about a real event?
Only from bitter experience I’m afraid. I’d prefer it not to be the case but sometimes if people will not listen to the warnings posed by carefully thought out theory and reasoning (a trademark of you blog and wider writing for example) , then empiricism – the observation of experience as I understand it – may hold the only tipping point.
But tell us – how else is a nation whose noses are wedded to their mobile phones, fake news, celebrity culture and Love Island going to be reached?
Answer? When it’s too late – human history is full of hard learnt lessons – forgotten ones too.
Excellent post. I agree asking the right questions is a good starting point: Where does money come from? Why does it have the Queen’s head on it? Why does it say I promise to pay? Who is making this promise?
Before, I become interested in the function of money, I just assumed, probably like most, that others understood it and everything was fine. What I had not appreciated was the extent to which we are presented with a particular narrative as an instrument of control, such that particular members of society could profit at the expense of others – the free market is not as free for everyone, because that works best for the wealthy elite in the great collective distribution struggle of history. The spend and tax circuit is completely determined by the political process, and in principle decided by us (the majority), but the reality is that dark money think tanks cleverly exploit our collective lack of knowledge (Marcus Garvey, “The man is not able to develop and use his mind is bound to be the slave of the other man…”). The message that needs to be communicated is that there is a better way, that it is possible to tweak the rules in such as way that the economy and well being of the median voter will improve. But to get the message out there you need to unite the collective behind a single message (e.g. the Scandi-model, a better understanding of spend and tax, government spend is our income, no such thing as taxpayers money, it’s all our money that needs to be returned to us once it has fulfilled its function, freedom maximisation rather than money as a constraint). If the collective is divided it cannot take on the power of think tanks and mainstream media.
Correction: Marcus Garvey, “The man who is not able to develop and use his mind is bound to be the slave of the other man…” !
4 mins..? Hardly take you through the opening credits…..
Don’t you think it deserves a ‘tad’ more than that..?
No….
That was enough
And I don’t spend all my day on these issues
I love the idea that there are ‘dark money think tanks’
While all the above comments offer sound critical analysis of the issue, I feel there’s an important political point being missed – which is that MSGs (main stream governments -lol) don’t want the general populace to understand the reality of a modern fiat money economy. By continuing to maintain and promote (via the MSM, academia, think-tanks, etc) the household analogy at macro-level they retain more control over the electorate. If the population at large understood how they’ve been lied to and short-changed (i.e. screwed) over the decades by successive governments there would be serious trouble at ‘mill.
It’s easy to understand why the Tories continue to adopted this strategy, but disappointing that the LP under Corbyn still appears ‘frit’ to explain publicly how the economy really works and the MMS fiscal policies they’ll pursue if elected. Of course, one way or another, everything changes eventually but not necessarily for the good of humanity. Was it ever thus.
I want to create that trouble at ‘mill
Is this one way of creating ‘trouble @ mill’..?
https://youtu.be/I0vSIoLT-FY
I watched about 4 minutes
And the anbswer is no: the film looks as though it fundamentally misunderstands money and debt
Like Positive Money
Apologies.. My response got put above….
It’s always been a puzzle to me that people can accept the fact that there is work to be done and there are people and resources available to do it but that governments opt to keep a large pool of unemployed as a lever to keep wages low all the while paying the unemployed to stay alive and remain unproductive. This is a political decision. A better political decision would be to utilise those resources to make the country/world a better place. The oil needed to lubricate those gears is called money. There is really nothing mysterious about it just a lack of imagination.
It is also a green decision to use available people
Their time is a wasted resource if not used when then want to work
The economic function of social security is to turn the unemployed, the sick and disable, and the old into economic assets by giving them not fortunes, but enough money to get them more or less by till their next instalment is due if they spend it, as perforce they must. This creates an environment of demand into which investment may securely be made, encouraging employment and general prosperity. Taxes duly paid should prevent any subsequent inflation. Rinse, repeat. This is not at all the same thing as paying the unemployed to stay unproductive, as is suggested above.
I’m sorry but I still find that “the household analogy” is something that I rarely (virtually never) hear of outside of this blog, not personally or elsewhere in other media.
No one has ever directly suggested to me that the government is like a household and if they did I would ask them the following questions:
Do you have a household? (the answer would usually be “yes”)
Does your household have its own central bank? (No)
Does it issue its own currency (No)
Does it levy taxes (No)
Does it set interest rates (No)
Then its not much like a government then is it?
Simple.
I do sometimes wonder if the household analogy is a bit of a strawman.
The household analogy is widely recognised throughout the discussion on the lack of understanding of macroeconomics
Many attribute it to Thatcher and the idea that the government has no money except that provided by taxpayers
And whilst not often directly referred to it is implicit in every suggestion that the government has limited funds and must repay its debts or it will fail future generations
You may not hear it, but it’s the elephant in the room much of the time
Which makes it no strawman
Your questions are good
Marco,
You’re right – but only about a subset of the population. For many of us who are not involved in economics or finance money is just money and we’re only familiar with it as a kind of commodity. If we think about it at all we maybe imagine it’s backed up by gold somewhere or something. Therefore ultimately it’s a finite resource and we must earn before we spend.
Now an economist obviously recognises that the household analogy is a vastly oversimplified model of reality (I’m being generous here). Many economists think it’s a faulty model but that it serves a useful purpose in maintaining the current order. They and like minded politicians worry that upsetting that order might be disastrous – and they may be right. Whatever, with them yes, the household budget analogy is a bit of a straw man.
For the majority of the public though I suspect the household budget analogy is simply “the truth”. Money doesn’t grow on trees after all – everybody knows that.
While your approach above is completely valid and may well work to shake people out of their naïve belief that their experience of money in the microeconomic sense holds everywhere and always even at the macroeconomic level I think it tends to leave them hanging on to their sanity by their fingernails because it doesn’t explain quickly enough the reasons for this contradictory dual nature of money.
People like me (non-experts from non-financial disciplines) become unnerved and worried when for the first time we hear that the state or commercial banks can magic money out of thin air. I guess the sense of disorientation and worry that causes can drive people to reject the reality you’re just starting to open their eyes to or drive them towards the Positive Money school of thought: “ARRRRRGH! Money is FUBAR! Quick let’s legislate to make money operate how I thought it operated before I learned the horrible truth!”
So I reckon we need some kind of pleasant “just so story” about how money has always been an IOU and actually not a big worry.
‘It’ – the household analogy is implicit. Most would not have a clear idea that the govt is a household.
Rather they believe that spending by anyone including govt has to come from income or borrowing. In the case of govt income = taxes and borrowing is getting loans from the market or if a govt has ‘overspent’ getting loans from the imf on condition that austerity be imposed to reach a sustainable position.
‘I’m sorry but I still find that “the household analogy” is something that I rarely (virtually never) hear of outside of this blog’
Really? Tory politicians refer to it all the time. May, Hammond, Osborne are always saying we have no money to pay for anything they don’t want to do. And virtually every episode of Daily Politics or Question time has someone asking ‘how are we going to pay for this?’ A pointless question that has only one meaningless and unhelpful answer in terms of government spending but does mean something if you are a household. The analogy is ubiquitous. How do you not see it?
“complex abstract ideas are frequently beyond the average cognitive capacity for our population”. It may not be false, but it may not be true. You list some of the reasons why people may not understand, or wish to understand, or are prepared to give the time and research to understand, but there are a host of reasons why people find it difficult to understand complex abstract ideas, but I suggest for most, it is not lack of cognitive capacity.
Complex abstractions don’t arrive into someone’s mind fully formed: there is a long gestation involving study, research, knowledge of what has gone before, discussion, errors, corrections and so on. Most people don’t have the time, the inclination to devote nor do they see the point. There are other things to do, more pressing issues, different priorities. How many of us on here understand some of the more esoteric theories about the nature of the universe, for example.
Experiments with deliberative democracy have found that given the resources and time most “ordinary” people can understand complexity and arrive at reasoned conclusions.
But that caveat aside, I think most of your argument is spot on.
What they need is a heuristic that lets them manage the complexity
Aye well, if you are going to help people understand things, don’t use words like “heuristic”.
It’s useful to those who are planning to help …. so I used it
G Hewitt,
I realise this is controversial and sails dangerously close to elitist arguments about intelligence. I say cognitive capacity rather than intelligence because “capacity”, to me at least, denotes a combination of specific intellectual skills BUT ALSO the time and inclination/inspiration to use them and the availability of relevant information to use them on.
Richard,
On the subject of heuristics – I agree we need one but I don’t think such a complex idea as the modern money system can easily be boiled down into a simple heuristic. However, I do think there is a heuristic for boiling down a complex and difficult to believe idea to a marginally less complicated and more palatable one.
We’re a social species well adapted to understanding and tracking social relationships. Our brains are therefore wired up to think in terms of people, their motivations and relationships. Thus narratives about people interacting with other people or with anthropomorphised non-human entities have a peculiar resonance for pretty much all humans.
If you look at religions this is how they communicate complex abstract ideas – they anthropomorphise them and create memorable narratives so that we can use the well developed social circuitry in our brains to process the otherwise inaccessible abstract ideas.
David Graeber makes a powerful argument that many aspects of the “modern” monotheistic religions are actually concerned with the nature of debt and money. Graeber’s hypothesis is that for thousands of years religions have been struggling to understand and communicate the idea and morality of complex, depersonalised debt structures and large, all powerful states. People have been forced to confront these ideas ever since civilisation pushed humanity beyond the maximum organisational capacity of interpersonal credit relationships based on mutual trust.
The Dunbar number is the average maximum number of people that a human mind can competently keep track of. Because the number of
possible relationships in a population rises exponentially with a linear increase in the population the cognitive load required to track all relationships rapidly becomes unbearable. The task is physically impossible anyway but even if it were feasible for a human to physically see and track millions of people we haven’t had long enough to evolve powerful enough brains to make sense of trillions of relationships in the time since modern civilisations have existed.
Most of us, even after 500 generations through 10,000 years of “civilisation”, are still stuck only capable of truly “knowing” a group of around 150 to 200 people. That’s likely not much higher than the number our paleolithic ancestors had evolved to cope with 10,000 generations and 200,000 years ago.
For groups larger than 150 we require extra-personal structures to ensure people trust each other and can maintain working relationships. Religions, states, corporations, laws, science AND MONEY are some of the main examples of social constructs our species have so far evolved in order to extend our ability to organise and know things beyond the innate biological limits of our individual minds and bodies. They are as much part of our extended phenotype as the physical tools we use and the structures we build with them. Because these social constructs evolved a long time ago and operate at the scale of civilisations not individuals and families their existence and nature isn’t immediately obvious to most of us. Though we rely on them for our survival we don’t consciously understand them just as most of us don’t understand much of our technology or the way our bodies work yet we’re all capable of getting on and living our lives using these tools on a daily basis.
We’re as ignorant of our social constructs as David Foster Wallace’s young fish are of the water they swim through (old fish: “how’s the water?” young fish: “what’s water?” 😉 ).
I think to get through to non-expert people like me we have to actually raise awareness of the existence of social constructs in the first place! It may seem obvious to some of you precisely how money works and what it is but for most of us it’s a complete mystery BUT WE DON’T EVEN KNOW IT IS A MYSTERY!
So that’s a strange and convoluted theory but at its heart I’m sure there’s a simple “just so story” we can all understand. The simplified story won’t be accurate for all or even any actual historic process in any society extant or extinct anywhere on the planet BUT the core idea is true for ALL societies that make the transition from small groups to large civilisations. That is: as our societies grow in size complex and extensively accepted social constructs evolve out of simpler direct personal relationships as a means to organise ourselves beyond the limitations of the Dunbar number but we mostly remain ignorant of the existence of these social constructs.
So although I’m not a religious man I’m happy to take a lead from religious thought on this and use the heuristic: “Simple anthropomorphised stories can be used to explain complex truths and abstract ideas.”
The trick of course is coming up with a compelling, succinct and memorable story! For that we maybe need people with an entirely different skill set to those possessed by accountants, economists, mathematicians, engineers, physicists and, in my case; overly verbose biologists.
Bring on the anthropologists, philosophers, poets and novelists
Adam, thanks for the clarification. Re religion, debt & money Michael Hudson has argued that Jesus actually came to declare the “Jubilee”, the cancellation of debts, and that many ancient and not so ancient societies started with a clean slate whenever a new leader assumed power. (http://michael-hudson.com/2018/04/jesus-the-economic-activist/)
I think Michael’s claim is very easy to sustain
I strongly suspect that the quote Michael relies on is one of the more reliable ones in the NT
If that bit about customary debt remission on a change of power is true, it appears to offer real incentives to creditors to do everything to prevent change; and debtors to plot for it.
It is posts, and comments, like these that keep me reading this blog.
I had never heard of the Dunning-Kruger effect (what does that say about me?). Wonderful stuff.
In order to get the message across the message must be tailored to the audience and the audience must be willing to accept that message. In order to do this we must remember the KISS principle and not get bogged down in the nuances of economic theories.
A simple animation would probably be most effective, especially if it started off with a government employee demanding tax from someone who did not have the money to pay it since it had not been created yet.
Keep up the good work.
According to one persistent troll this whole blog is evidence of the Dunning-Kruger effect
But they have adopted the identity of a person I know they are not, which says a great deal
“we must remember the KISS principle and not get bogged down in the nuances of economic theories.”
Absolutely right.
One common misconception among MMT adherents is the assumption that they always need to convey the whole idea and all the baggage that goes with it.
They don’t.
The truly amazing thing is that debt nature of money is actually staring them in the face, if they once consider how things worked before the introduction of paper money.
In even a sophisticated society, such as the Roman Empire, or indeed in any society since, and many before, the King/Government/State minted coinage to put into circulation. So the money was a state creation, without which commerce would have had to be on the basis of barter, with the coinage constituting a store of value, and a right to access goods to that value, and also constituting indebtedness, as expressed later in the “I promise to pay the bearer” phrase on paper money, but implicit, even in physical coinage. And, of course, the fact that the State created the money, gave the State the ownership of tax on that money, as Richard has consistently argued.
Paper money, and its later development, digital money, has only severed the need for the state to have enough available metal – precious or non-precious – to mint sufficient coinage for requirements, with the added plus that an abundance of paper or digital money does not lead to an effective devaluation of the currency, as happened with precious metals.
For Spain’s fall from 16th century near dominance of European politics to 17th century near irrelevance is said to have been caused by the devaluation of her currency and raging inflation, resulting from the flood of gold from the New World.
Andrew,
“The truly amazing thing is that debt nature of money is actually staring them in the face, if they once consider how things worked before the introduction of paper money.”
True but we struggle to accurately imagine a world without money. When we try we often imagine a world like ours (lots of people who are largely strangers to each other) and so we imagine that world operating via barter (which is the only way distrustful strangers can engage in trade). We then imagine such a people quickly casting about for some commodity to use as money because that world would be too cumbersome.
Obviously the mistake is to project too high a population and too alienated social relations back into our imagined past. David Graeber and other anthropologists who actually investigate how different societies organise themselves have shown how very different non-monetised economies actually are and how dependent these small societies are on simple interpersonal credit relationships.
It’s all just too alien to imagine off the top of our heads for most of us because we grew up in a fully monetised modern economy. We can get it when it’s pointed out to us in an accessible way but it’s far from being obvious enough that we all stumble upon it naturally while going about our daily lives.
When it comes to understanding complex issues most people will bow to authority. It is ecological, it saves energy to have someone else explain how something works. Accordingly in the UK it makes sense for a political party that is not corrupted by Capital to gain power and replace the governor of the nationalised bank, the Bank of England, with a new governor. This individual will have a clear mandate to produce a simplified but definitive explanation in regard to money creation processes in the UK and have a copy mailed out to every voter in the UK.
Schofield,
Precisely.
I wouldn’t dream of trying to fix the gearbox in my car myself – I’ll trust an experienced mechanic to do a much better job much quicker than I’ll ever be capable of.
So it is with economics and politics. Most of us hope that if we concentrate on doing the things we’re best at then those who are best at economics and politics will look after that side of things on our behalf.
Unfortunately it turns out people can’t always be trusted to get on faithfully with the stuff we entrust them with. We, the masses, need to know enough to provide adequate scrutiny of those to whom we democratically delegate responsibility for the economy.
However, as you point out, once they receive that delegated responsibility those people have a strong moral duty to ensure that we the electorate remain sufficiently well informed that we’re able to delegate effectively at future elections too.
“Experts” are often (honestly) wrong – smoking, blood-letting – or confused – drink/don’t drink red wine and sometimes deliberately wrong because it would ruin their career. How do we know whom to trust?
G Hewitt,
You’re absolutely right but what choice do we have? If we choose to trust no-one our civilisation falls apart and modernity with it.
How do we choose who to trust? Firstly we have to make the effort to learn enough to be able to make some informed decisions. Secondly we have to track what those we trust actually do.
It’s a bit of trial and error – if we get shafted we make the effort to learn how and why we got conned and try to avoid similar happening again. It never ends though, there’s no final victory for truth, honesty and civic duty. Every new generation faces new dilemmas in where to place their trust and they’ll get conned in new and innovative ways.
Brilliant, controversial and thought provoking post from Adam Sawyer there.
I have difficulty with the issue of re-branding the Household Economy analogy. It’s too ingrained in the public consciousness to remove in one step.
I think I would first of all try to get the public to understand and accept what the role of the state is in making things work. They provide education, healthcare, the protection of law, military force, welfare support and so on. The one thing nobody ever says of the state is that it provides the money we all need to conveniently transact with one another.
Governments are well known for taxing – for taking money away from the Man On The Clapham Omnibus – but the whole “Tax and Spend” myth has stymied understanding of how the vital services listed above are made possible. What isn’t so well signposted is that the State provides the money, because only it can and because there is demand for it. The State writes the rules for, provides the basic kit and referees the game we all play. Get people to understand that this in and of itself isn’t a bad thing.
Get people to understand that the Government can create money at will. Get them to accept that Tax and Spend is the wrong way around… Get them to accept that the Government spends and therefore MUST tax (which is part of its remit to provide an environment in which the rest of us can conveniently transact with each other).
Get them to accept THAT, and the analogy of the Household Economy falls away, because it simply ceases to make any kind of sense. You can’t keep people scared by telling them the UK must “Live within its means” if they understand that, as a sovereign nation with its own currency and central bank, its means are effectively infinite.
I don’t think it’d be that much of a leap to get Joe Public to grasp that money is a purely artificial arrangement and is created at will. The Bank of England are quite open about it. As a working example, people know about QE…
What I really can’t get is why it’s taking so long…
When the government is equated to a household it needs to be answered by saying “how can your household go bankrupt if you can print money legally as the government can? The government did it and gave X billion to the banks and called it QE”.
On the basis of spend and the tax it needs to be explained simply such as “Assume there is no money (before the Romans invaded) observably there is no money to be taxed. So money has to be minted and spent before it could be taxed by the people who minted and spent it.”
Once you have refuted the argument the you can develop the consequences.
I doubt there is a credible economist out there who thinks the the U.K. “technically” can go bankrupt. A fiat currency is understood. This isn’t the argument. The question to ask is “how would FX and Bond markets react to a Corbyn Govt using PQE to deliver the needs of a nation”. Obviously for different reasons Argentina, Turkey, Brazil and to a much lesser extent Italy are current examples where economic hardship has resulted from an adverse reaction by financial markets to economic management. Unless the UK became entirely self dependent then we also would remain vulnerable. It’s a real barrier that has not been addressed and endless ideological rhetoric is not going to provide an answer.
http://bilbo.economicoutlook.net/blog/?p=35685
James,
Sovereign governments issuing free floating fiat currencies don’t need to opt for autarky to protect themselves from the opprobrium of international markets. A combination of sensible regulation and thriving economy is more than sufficient to keep investors happy without allowing them to tulle the roost.
Some like to claim they’ll throw their toys out of the pram if they don’t get everything precisely their own way. They may even be successful in forcing some nations to do their bidding. However, Britain has sufficient resources and a big enough and advanced enough economy that simple greed will ensure investors come back after any hysterical flouncing off that may occur following a shift away from neoliberalism.
Please note that Italy (or any other Eurozone country) is not a currency issuer and so can be leaned on by bond markets. The UK is a currency issuer so holders of UK gilts are entirely at the mercy of the BoE and Treasury and not the other way around.
Also the discussion re. the household budget analogy is one more concerned with communicating economic ideas to the general public rather than debating economists who, as you say, largely know the truth.
Thanks to you and Marco on this one
” Unless the UK became entirely self dependent then we also would remain vulnerable.”
Umm, not really and I’m not too sure about some of your examples. Britain is not part of the Eurozone and as such has its own central bank and currency. Argentina borrowed in a foreign currency. Britain, like most nations, does not do that.
Australia was faced with a massive, rapid and totally irrational devaluation at the hands of currency markets in the post-GFC panic. Those markets were dealt a swift lesson by Australia’s Reserve Bank which acted decisively with an intervention and stabilised the currency. Similar interventions have been conducted by the Bank of Japan among others. The BoE, if need be, would do the same.
This article makes further explanation and does so quite well:
https://www.ceps.eu/system/files/book/2011/05/WD%20346%20De%20Grauwe%20on%20Eurozone%20Governance.pdf
Most countries do not need to be bullied by financial markets. Many are stupid enough to allow that voluntarily. There is no particular need to be “entirely self dependent” and that phrase is not particularly relevant.
@ James
Bond markets can go hang.
QE shows we can control them.
FX is another thing with only about 2% of FX being actual foreign trade – the rest is a casino.
Capital controls are what should control that.
As well as a diverse non-specialist economy à la Germany.
The UK is vulnerable, I agree, particularly as we import at least 40% of our food.
The Rule of Law is our major defence and that is why government failure to spend sufficiently on properly maintaining the legal system, and also allow tax fraud, is distinctly disturbing.
And tax law not enforced is deliberately undermining the law, economy and democracy
@ G Hewitt – “How do we know whom to trust?”.
You could try applying a simplified version of ‘Occam’s Razor’ 😉
“The UK is a currency issuer so holders of UK gilts are entirely at the mercy of the BoE and Treasury and not the other way around”.
“Bond markets can go hang. QE shows we can control them.”
Well the point i was trying to make is that QE has controlled bond markets so we have currently have control of long and short rates but that doesn’t mean that can happen indefinitely. In a PQE word there really is no need for investors to buy Gilts in fact the Gilt market is defunct. So, in that sense, the bond market can indeed go and hang. BUT we are requiring a stable currency so price and the price of sterling would be determined just like any other commodity….”A combination of sensible regulation and thriving economy is more than sufficient to keep investors happy without allowing them to tulle the roost”…well another interpretation might be “More State interference is diminishing the opportunity to make profit and there is potentially an open ended supply of sterling through PQE as a Government elected on a populist mandate tries to fulfil its manifesto promises of more public expenditure, nationalisation, cancelation of student debt etc etc”…now that might result in the UK Government losing control of interest rates as international investors would demand premium rates to counterbalance a weakening currency..or you just let the currency find a level and risk importing inflation pretty quickly. So the examples i gave were of countries who have largely lost the ability to control interest rates and / or the currency (for whatever reason) . The PQE mandate risks us joining them. Now this is the issue that has to debated. In truth we probably wouldn’t know till it was tried which is my point. It is an economic policy which comes with considerable risk and it isn’t the one way ticket people want it to be.
You do realise PQE does not require investors, don’t you?
And you do realise it is only proposed because investors won’t invest? If they did to full capacity it would be both pointless and harmful?
Given those things don’t you realise your assumptions make no sense?
“ do you realise PQE does not require investors” .,,, I agree that’s why I said the bond market would be defunct
BUT..there has to be demand for Sterling from international investors or it will fall through the floor..and we would have to offer high sterling interest rates for that reason..so you largely loose control of rates because they would have to reach a level that appeals to markets – this is what is happening in many countries today.,,
OR we ignore the FX and let it find its natural rate. The problem there is it may well be considerably lower and we will import inflation etc etc and we have an economic mess.
Why does there have to be demand for telling from international; investors?
And what for?
Only because it has use
What is the use?
In trade?
Will sterling have a use in trade? Yes, if we have things to sell and buy
This os the real issue. We have tried to cover our trade deficiency by selling the family silver and using finance to maintain an artificially high exchange rate that has cost the country dear
We don’t need high interest rates: we may have to accept the true value of sterling. Brecit may give ius no choice. The process has already begun.
And inflation works through, remarkably quickly
[…] Cross-posted from Tax Research UK […]
Maybe I am wandering off the point, but I am concerned with the way antiquated ‘household budget’ ideas fixate the public; while their understanding of ‘money’ is being change fundamentally now, without anyone noticing.
My example is very, very basic: parking. We are being encouraged by city councils in city/west end areas to pay for street parking in cash at meters (fewer and fewer of them, located further and further apart). I recently discovered that on different days, and at different meters; they did not work: they returned the coins. There is an option for drivers; to phone and use a card to pay. I did so. It is all done by recorded instructions. It took several minutes. At the end, I found they had kept my details, and informed me that next time I could process the payment in 30 seconds. I then wondered if the failed coin transaction was deliberate: the local council can cut costs, and outsource the whole service. As far as I could estimate, my 4 hour parking by ‘card’ payment was about 50% higher price than coins.
I was extremely annoyed at being ‘bounced’ into a card payment; unable to speak to anyone, and also ‘ripped off’. Actually that is not what makes me angry. What makes me angry is the ease with which we are being edged, pushed, steered toward a cashless society, on the back of ‘convenience’. What is wrong with this?
A cashless society delivers all of us – all of us – into the hands of the banks. We become their prisoners. They will slowly command all our ‘money’ transactions; they can ‘rip-us-off’, and they can keep much of the profit available from every transaction. At the same time they are closing bank branches wholesale, and their argument is, it is the public that is leading this change; for personal convenience. This is only a part of the reason; the banks are steering the public toward cashless, smart-phone apps., to cut costs. This will make the public their prisoner. The banks are slowly closing off any opportunity to escape their grip; and it is being allowed by government and parliament, virtually without comment.
I do pay by card on occassion at a car park near my station (when it’s raining: otherwise I am on my bike). It is 5% more expensive. There is no reason why: it must be cheaper to collect. Your logic makes sense.
The move to a cashless society, that serves the banks interests even more than our convenience, worries me even more.
It’s great that The Guardian is now – in its own way – doing its bit to spread the MMT/MMS word. With stuff like this, eventially the ‘home/household truths’ will filter through:
https://www.theguardian.com/commentisfree/2018/jun/15/the-guardian-view-on-the-nhs-cash-boost-pay-for-it-with-deficit-spending
That may well be blogged in the morning
Your optimism would be tempered by reading the comments that followed the Guardian website article. One MMT-er trying to rebut the assertions of the mass of dogmatic ‘household-budget’ ideologists; which is not only thankless, but tends to lead to more fractured, heated, absurd and exaggerated argument.
I follow the advice of everyone Guardian journalist I know: never read the comments on CiF
They don’t
My response was to Mr Green. I nevertheless take your point; but what I was pointing to was not whether comment sections of newspapers are abused (they are); but the arguments used reveals what is believed, or thought to be believed by significant sections of the public. The fact is, the ‘household budget’ trope (like ‘garden tax’) has been effective; we do not produce the ‘easy to whistle’, glibly plausible tunes.
I agree it is often like that on Guardian CiF, but in this case there seemed to be several people arguing the case for a MMT/MMS perspective, countering the usual neoliberal hysteria about the possibility of government spending to invest in the 99% rather than the 1%. For example, several comments about ‘burdening future generations with debt’ were effectively countered. While such efforts are unlikely to influence the views of the die-hard deficit-hawks or right-wing trolls, they might just open the minds of less committed people to the possibility that there is an alternative.
Well done those doing so
It is worth the effort for the reason you note
Economics: derived from Greek, Oikos – Household, and Nomos – Law. Of course, etymology does not define current meaning and usage. But it is worth remembering that economics is about functioning societies of whatever size, from family to state and nation and beyond, and their production, allocation, and consumption of goods and services. The household is the smallest such unit – within the household money has been and is rarely circulating to ensure the functioning of its economy. A three year old does not purchase with pounds her breakfast from mother every morning, and a son does not have to pay a parent for advice and help with homework. Beforre the invention of money, goods and services and wealth were circulating within societies and traded between societies without the use of money. So it is reasonable to define economics as etymology suggests – the science of the household but to remeber that economics is not the science of money.
But when we’re talking macro the household analogy makes no sense however looked at
But DSGE modelling does assume barter and utility maximisation, so they clearly think the household analogy prevails as you describe it.
“…. within the household money has been and is rarely circulating to ensure the functioning of its economy”.
You put your finger on the reason why the household analogy does not work. The value of activities within a family cannot be articulated purely in monetary terms. Indeed the more valuable the activity (that may not adequately even be expressed or easily expressible in words), the less it may be adequately ‘quantified’. Indeed the activities that are identified as ‘economic’ (monetised) are conventional. This ‘blind-spot’ in economics capacity for observation of reality, may easily be exploited for political purposes, or purposes of greed. Many activities of a nurturing nature (within families) are simply not identified as economically ‘valuable’, but may be crucial to the survival of the ‘economy’ (which relies on them being ‘free’). The distinctions are arbitrary; and convenient in the service of Neoliberalism.
‘So it is reasonable to define economics as etymology suggests — the science of the household but to remember that economics is not the science of money.’
Mike – In the end you can offer any definition you like -I like the fact you want to consider history – mainstream economics does not 🙁
But Macro will be about both in our economy: Trading = Money / Goods and Services then, Money -Goods and Services- Money – Goods and Services … Wash and Repeat Also if you read Graeber above, you will notice that your ancient ‘Freeholders’ were trading: Debt- Goods and services- Debt – goods and services before notes and coins too. Most of us have been paying tax at the end of this too. Since Christ turned over the money lenders tables. So even theology has something to say here!
Very good discussion above by folks explaining the MMT facts to FX trader James. First thing I thought about recent Argentina case was formulated in MMT, is the Argy debt denominated in dollars?
Adam Sawyer and Richard Murphy above. ‘The trick of course is coming up with a compelling, succinct and memorable story! For that we maybe need people with an entirely different skill set to those possessed by accountants, economists, mathematicians, engineers, physicists and, in my case; overly verbose biologists. No, these folks (including yourselves), outside mainstream economics have a huge role to play in the new story.Remember, main stream economists like Wren-Lewis would insist that Macro Economics is not a ‘Liberal Science’ to be learned by voters (educated hopefully in some history) but a ‘technocratic science’ to be handed down to the voters politicians, by narrow experts like him. This is our (the citizens) problem situation. The problem of mainstream economics right now, as Wren Lewis sees it, is not a Kuhnian revolt, it is that mainstream is merely a bit ‘insular’, does not look at the other discplines, like Biology, for example. But the central problem for us is that Economics is the central ‘Policy Science’ in peacetime, but it has ceased to talk to, engage, and educate the voters of our Democracy. To be fair, Wren Lewis points out the he and other mainstreamers have been attacking the Tory, Econ 101 ‘household’ crappola for years. He has. But he cannot fathom why so many voters take the bait. Moreover, he cannot bring himslef to see that MMT is, about bringing Macro to the voters (which is ironic as that is his job at Oxford). He is so removed from this Liberal project that he cannot even bare to use the words MMT, inventing into existance the meme that MMT is not new, can be derived from mainstream and is merely old/new ‘fiscalism’ (he invented the term into being). Forgetting that the name MMT was chosen not because Abe Lerner, Keynes, fiscal policy etc where unkown to the mainstream, but rather the Liberal/political direction of travel in MMT: explain state/ money, explain state issuer/ user, explain debt is also asset, to citizen voters in plain English. This is a completely new economic paradigm from: assume a perfect economy, assume Robinson wants to buy/barter x from Friday, produce a mathmatical model, derive conclusions, publish in academic journal, wash and repeat. Will this battle continue against the citizens? Tory party, City of London, Tory press, for sure it will continue, but Wren Lewis and the mainstream don’t do paradigm shifts either 🙂
As an educative model, I like Warren Mosler’s story of the parents who regularise their children’s household tasks by issuing coupons for jobs done. And then, to make coupons meaningful, require that a certain number of coupons be returned to the parents periodically. This model shows clearly that the parents are never short of coupons; they can print more at any time. This model can be elaborated, and has the simplicity of — a household model!
So you accept PQE will cause Sterling to fall and given we have things to buy from overseas we will import inflation. How do you propose to deal with the fall in real disposable income by uncreaseing tax? And reduce disposable income further? How do you prevent a full blown economic crisis?
No I don’t agree that
I think we have a system that currently deflates the real economy and artificially maintains the exchange rate
I want to restore the capacity in the economy which will inflate the exchange rate. PQE would do that
Stop playing financial economics in other words and do the real thing
PQE will inflate the exchange rate – complete nonsense. A Corbyn led Govt In complete control to print as they see fit will crash sterling. Go and canvess some opinion in financial markets. Of course you will think little of their opinions but you should check anyway. You really have your head in the clouds.
I agree – there will be a co-ordinated attack for a few days
That’s because markets will try to profit
So what? Let it happen. Let people see that is what markets do
And then the substance will come through and the reality that investment is a great thing and creates wealth will become apparent and markets will rise
All you show yourself to be is a troll
I would find your outrage and hand-wringing more convincing if you had not passed over in silence the fall in the value of Sterling since Brexit, against $/€; and silence about the rise in national debt. The problem with your position is, you seem to be describing less the MMT position, than where we are now. You seem confused, at least to this reader.
[…] http://www.taxresearch.org.uk/Blog/2018/06/15/the-household-analogy/ […]
A troll? Someone who challenges your thinking more like. I actually don’t disagree with most of what you say but I see the problems PQE will present. You present it as an easy way to achieve economic utopia and people want social justice so they follow pretty much blind. Every course of action has consequences. Regarding PQE You say Investment will protect the currency. Investment through the the State printing of money is massively increasing the money supply, the extent to which is open ended. That will not encourage inward investment. It will “crowd it out”. So less international interest in Sterling and a massive increase in the supply of sterling must imply it will weaken against other major currencies. We will import inflation. Obviously the MMT solution to increase tax would be a disastrous.
A troll without a doubt
From the false email onwards
“Dunning-Kruger Effect” where “… Essentially, low ability people do not possess the skills needed to recognize their own incompetence…..In many cases, incompetence does not leave people disoriented, perplexed, or cautious,” wrote David Dunning in an article for Pacific Standard. “Instead, the incompetent are often blessed with an inappropriate confidence, buoyed by something that feels to them like knowledge.”
https://www.verywellmind.com/an-overview-of-the-dunning-kruger-effect-4160740
And?
The best part of David Graeber’s book for me was the assertion that in
ancient communities; you contributed what you could and took what
you needed. No more and, more importantly, no less.
n.b. before and then alongside barter.
All life has been based on society/ socialism.
Now families in need are, ‘pariahs/scroungers.’ Why do the ancient
communities appear to have understood this far better than us today?
Actually the average person is more than capable of imagining the alternative. Because all we have to do is tackle the INCORRECT metaphor at source by posing one very simple question…
Q: If government is not like a household, then what is it like?
Having got their attention, we then fill that void with a CORRECT metaphor. What could that be? Might I suggest one almost everyone is familiar with: Football. So the response to the question would be something like….
A: Government is ‘like’ the FA. Firstly, the UK government, like the FA vis-a-vis league points, is the ONLY entity that can issue £ sterling. Secondly, the UK government, like the FA vis-a-vis league points, CANNOT ever run out of £ sterling.
The metaphor is equally apt for many other aspects such as the FA will ONLY accept its OWN points (not EUFA Champion’s League points, not gold, not Bitcoin, not anything else) in ‘payment’ for the ‘tax’ collected at the end of the season – when it zeros all the teams points in the table.
From there the message can be rammed home by contrasting and comparing the ludicrous ‘household’ model vs the ‘FA’ model.
For example, we might point out that that never in the history of Association Football has a sports reporter ever asked the FA “Youv’e issued 350 league points this season, how on earth are you to going to afford issuing yet more points for this Saturday’s fixtures?”
Similarly, never in the history of the game have football fans lost sleep over the FA’s possibly going ‘bust’ and being unable to sustain its ‘deficit’
Now posted as a blog
Thanks!