Money changes everything

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I pretty much make it a matter of policy to ignore whatever Tom Worstall has to say. He is a fellow of the Adam Smith Institute (which probably says all you need to know about him) who has over the last decade or so written a very great deal about me. It is fair to say very little of that output has been complimentary. To get some flavour of the man, and his curious obsessions, it may be worth reading this.

I have, however, decided to break my usual rule. That is because he has written a response to the post by Charles Adams and David Laws regarding money and financing of the NHS first posted on Progressive Pulse and then again here.

The core of their argument is that:

The unquestioned assertion that a highly developed currency-issuing nation cannot afford high quality healthcare is based upon a set of inter-related and almost universally-held false assumptions:

  • Money is in limited supply (as there is no ‘magic money tree’)
  • Taxes fund government spending.
  • Private banks lend out pre-existing savings.
  • NHS spending is a burden on the economy rather than a boost to the economy.

To this Worstall responded on CapX, saying:

There is ... one rather large error underpinning both of these ideas. [A] doctor and a physicist tell us that Modern Monetary Theory means we can have as much of the National Health Service that we wish. For money is no object: there’s simply no shortage of it.

So far, so good. It is indeed true that there need never be a shortage of money. But Worstall continues, saying:

The underlying error is that economics isn’t the study of money. Sure, monetary economics is interesting enough, but that’s not the core of the subject. Instead, we note that there are unlimited human desires but only scarce resources with which to sate them. Changing the amount of money in circulation doesn’t change the number of those wants, however, nor the resources we have with which to satisfy them. It only changes the counting we’re doing as we do so.

Before you throw your hands up in horror I should note that Worstall does reveal here his deep knowledge of, and unfaltering belief in, neoclassical economics. What he is saying is wholly orthodox economic teaching, taught day in and day out in universities across the world. It is quite literally the case that in general equilibrium based macro economic thinking, which dominates the thinking and teaching on this subject the world over, that money is effectively ignored. As too, incidentally, is taxation.

What instead matters according to that theory is the matching of supply and demand, as Worstall says. That this happens in the real world through a medium of exchange does not matter to macroeconomics, apparently. And the fact that some of that medium of exchange is also redistributed via taxation prior to supply and demand being matched matters only to the extent that doing so is an aberration that alters outcomes in ways that are considered sub-optimal.

This is because, as Worstall makes clear, in this dominant type of macroeconomic thinking money is not considered a part of the economy as such: it is simply seen as a facilitator of it. And in that process of facilitation it is treated as an exogenous variable i.e. ones that does not impact on the working of the model, or its outcomes.

And this is Tim Worstall's fundamental error. Even the most cursory glance at the real world would assure him and his fellow neoclassical believers that money is not an exogenous variable in the economy that is neutral as to impact. It is instead an endogenous one: i.e. it is a part of the economy, and has direct impact on what demands exist and how they are met. Tax, of course, plays the same role, but that is unsurprising since tax and money are the flip side of each other.

Failure to appreciate this permits Worstall to make some pretty wild, and glaringly false claims. For example he says this

Because it’s the resources which are scarce. Take health care, for example. There’s the labour needed to do it, the buildings to do it in, the implements with which we do it and so on. But at any point in time there’s only a given amount of each of those things. Increasing the money supply doesn’t increase the amount of any of them.

Of course, the economy is not a zero-sum game, it is always possible to train up or import more labour; we can build more hospitals, make more medical equipment. But more money doesn’t increase the resources from which we can do all of those things.

Three thoughts follow. First, there is the most extraordinary suggestion implicit in this that the availability of money demand within the economy does not change behaviour. Or to put it another way, that if more money is dedicated (whether by tax or not does not matter) to healthcare demand then there will be no reaction to this monetary stimulus in the real economy and nothing will happen as a result: no new health care will follow. What Worstall is saying here is that demand cannot apparently alter supply in the real world.

Second, what he's also saying is that if there is underemployment in an economy working at less than  full capacity (both of which are true in the UK at present because we suffer massive disguised unemployment in the form of under-employment) then adding to the money supply cannot stimulate a greater supply of goods and services to the economy. This is glaringly obviously untrue. He also ignores the positive multiplier effects of such spending in that situation, although they are now widely documented.

Third, he says:

In order to have more medical care from our scarce resources, we must have less of other things. Less because those things we were devoting to making something else are now being directed to delivering more health care.

In other words he totally contradicts his own claim that we do not live in a zero-sum world by saying that this is in fact just what we do live in. He justifies this by saying:

It is possible to get all Kenyesian about this and say when in recession we can boost output of all things – and maybe there’s some truth to that. But that’s not what our simplistic money tree peeps are saying. Instead, they are insisting that because we can print more money then there’s no shortage of the resources we need to do whatever we want. Which is, of course, complete tosh.

Except of course that's not what we are saying. We are getting all Keynesian about this and are saying we can spend until we do get full employment at living wage conditions and with appropriate levels of productivity, at which point we'd definitely say stop the spending. Unless, that is, people demanded more of it through the ballot box, when our response would be (Nordic style) to tax more and continue the spend, not to increase the overall level of income in society any more, because I agree that would not then be possible, but to instead to reallocate that spend to social purposes that society wanted and markets could not deliver.

Worstall, of course, does not want to embrace this possibility. He also, slightly bizarrely, says the UK is at full capacity and employment as an economy now (because false assumptions are, throughout the essential premises of his arguments). To which he adds the claim:

Of course, by increasing the efficiency through which we produce things from our scarce resources over time. [But this]  option is [not] waved away, aided nor hindered by printing more money.

Which is a pretty big claim, because what he is actually suggesting is that using money as a mechanism to direct resources towards investment has no impact on outcomes in the real world, when that is very obviously untrue.

But he really does not think this is the case because he says:

So the Magic Money Tree and folk versions of Modern Monetary Theory fail. The limitations to the things we can buy ourselves are not about the quantity of money, they’re about the resources we have available to meet our desires, nothing else.

In which case he needs to explain why he is so obsessed with preserving the right of  money to hide in tax havens, and why he is so obsessed with preserving existing monetary wealth distributions, and why he is so opposed to progressive taxation that might redistribute this money that he says has no impact on the well being of those who own it. Except that he hints at the answer to all these three questions in one telling paragraph where he says:

Money’s just the way we count who controls those resources, it’s not a measure of what we can put to work at all. Thus printing more money doesn’t alter the fact that we must still choose which activities we’re to devote what resources to, there is no get-out clause here.

But this is not true. Because if in the process of printing money we change who controls resources we really do change outcomes. That's because the spending preferences of those with lower incomes are different to those with higher incomes. And the spending preferences indicated through the ballot box are different again, and money printing quite definitely facilitates those preferences,  even if Worstall has spent much of life ranting about the unfair imposition of this democratic choice on the owners of monetary wealth, which he would not have done unless he knew that it really is true that things do change as a consequence of government money printing and the related activity of taxation.

So in fact what Worstall has written indicates three things. The first is the bankruptcy of conventional macroeconomic thinking to which he, and the greater part of the academic community, subscribe.  The second is the falsehood in his own arguments, which can only be sustained by either false or unrealistic assumptions. And the third is that this conclusion of his is wrong:

Another way of putting it is that both the Magic Money Tree and Modern Monetary Theory are useless as actual economic theories. For they don’t change our reality at all. We can’t have everything, so we’ve got to choose what it is we really want.

Actually what's true is we can't do everything, but that changing the way we control money by letting government print more of it to achieve social goals can very fundamentally change our constrained reality. But, then, he knows that already, because if he didn't he would not have bothered writing at all.

As an example of failed reasoning Worstall takes some beating. Buy don;'t expect me to engage with him again: once a decade is enough when faced with folly of this level.