I am aware that we have been discussing the need for narratives to explain the economy on this blog in the last week. Much of that discussion has focussed on issues around money and the way that the government is funded. But there are other narratives that are also important, and almost as little understood.
One of those is the importance of the mixed economy. A narrative that I created in my book The Courageous State to explain this suggested that there is a necessary balance between the state and private sectors, each having a very real role to play in the economy. In this context I think the economy is a bit like a cappuccino.
The state is the cup. The productive economy exists within it for the purposes of this example. (Of course it extends beyond it, but that is for another blog; just think about the coffee shop if you want to anticipate the direction travel, and also imagine the saucer as the social safety net if you want to take the metaphor in another direction).
The espresso that goes into the cup first, and so appears to initially sit on the bottom, is the government. It is fundamental to the whole thing. Without it then the cappuccino is not a coffee. And if it is good then pretty much the whole thing will be, and vice versa.
The hot milk comes next and is the private sector that builds on the foundation of the state.
On the top is some chocolate or nutmeg, which is the thing we all see, and which we as a result think defines the cappuccino. This represents the bits of life that we tend to think most fun, because they're what we want when all the basics have been dealt with. And because the private sector produces most of these fun things we tend to value what the private sector does most when in fact none of these fun bits would be possible without the state and the mundane, and even rather boring things, that much of the market also does.
The cappuccino helps us understand that. The reality is that in practice a cappuccino stands or falls as a whole. It's hot frothy milk without the espresso. It is just an espresso without the milk. Now I admit, both are acquired tastes for some: we should not ignore that. But the reality is that many think that the compromise — with the fun bits on top — is best. And most importantly, when drunk you can't tell the component elements apart. Each integrates to make a whole.
As I suggest is the case with a mixed economy: the parts are interdependent and make a whole and without each other that whole could not exist.
Let's not push the metaphor too far, but the task we face in our political economy is to find politicians who, like a skilled barista, can blend the right product for our economy that delivers the appropriate mix of state and private where each recognises the role of the other and is willing to support the role the other has to play.
I would suggest that we are short of those skills. Far too few politicians appreciate the fundamental role of the state. We have had too frothy an economy as a result that is too volatile to be durable. And we also had a private sector that is refusing to recognise it is even in partnership.
I might also add that those on the left who think we can do without the private sector get this issue just as those who despise the state on the right do.
My aim has always been for a cappuccino economy: one where state and private sectors both flourish because each is allowed to do what it does best. We're a long way from being there right now.
And in my opinion there are two reasons for that.
The first is that the espresso has been too weak for too long. We need an extra shot.
And on the other hand, shareholder capitalism has withdrawn all the resilience that companies have needed to survive the type of stress we're now seeing. It's as if they thought they could get away with semi-skimmed milk when full fat has always been needed to ensure that companies have the strength they need to be good employers, reliable suppliers and players for the long term able to fulfil their commitments to all in society.
You'll note that it's not one side that needs a boost right now: both do.
–––––-
And if anyone wants to work out a script for that I'd be pleased to see and narrate it.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
I like it.
I wouldn’t want to make the metaphor too complicated. But if, like me, you prefer the milk to be plant-based rather than dairy, the barista needs to know how to stop it curdling.
The lesson – more choice needs more expertise, not less.
🙂
That reads like the basis of a script for a simple video….a commentary whilst a cappuccino is being made and very easy to film using basic equipment….will need a coffee machine though
I agree broadly with what you are saying, but I see it more as something that is a result of a surfeit of ideology (public bad/private good) than any lack of skills. Politics is dominated by ideologues.
Evidenced by the infamous faulty spreadsheet (Carmen Reinhart & Kenneth Rogoff) used by Osbourne that seemed to cleave the economy into private and public and see them both as autonomous entities, when in fact we know that the public sector uses the private sector in its supply chains for goods and services (and the private sector relies on public sector contracts and is also a net beneficiary of State activity).
The two sectors (as you make clear) are not exclusionary, nor do they need an standard and arbitrary number to signify what the best mix of public and private is as Rogoff and Reinhart suggested – that will always be dependent on local conditions and how the service delivery is organised in any state.
The real issue is intelligence and integrity. Rogoff and Reinhart acknowledged their mistake. I can’t recall Osbourne or the Tory party acknowledging this and scaling back austerity because they lack intelligence and integrity. And they even now refuse to accept that they get things wrong – look at Covid-19.
As for Rogoff and Reinhart, I recall that it was just a paper they did – not an edict. To slavishly use it as a basis for awful policy making shows once again that ideology (idiotology) trumps intelligence every time in our politics.
If you read Richard Thaler and the economic behaviourists they warn that stuff like nudge theory needs to be used cautiously and morally for the right reasons – there are ethical questions that must be answered. But ideologues are blind to these caveats.
And as we are in the midst of VE day, remember the ultimate ideologues – the Nazis – whose hatred of the Jews and Slavs meant that it was not enough to enslave them, they had to annihilate (kill) them too. If they were really sensible, they would have treated them humanely, fed them etc., and they would have had a reserve of labour to see them though the war. Instead, they were under constant pressure manpower wise. Such extremes show how short sighted and self-destructive the ideological element can be in politics.
As for skills, they are there Richard I think – it’s just that because of ideology they have not been put to the task you suggest. Nor are there enough of the right people in the civil service to execute it, having been hollowed out like everything else. This country has the skills – it just has not been asked to do what needs to be done – instead it get asks to organise something like BREXIT!!!
https://www.theguardian.com/politics/2013/apr/18/uncovered-error-george-osborne-austerity
I’m still waiting to hear how Libertarian half-baked market fundamentalism is going to save the planet from over-heating. I know I’ll never hear it because there’s no room in their ideology for non-profitable activities. Stupidly this necessitates ignoring reality and pretending to themselves there isn’t a climate change issue! Effectively then there’s mass denial human activities consist of a mix of the profitable and non-profitable, for self and for others. Clearly this is a form of insanity, a form of mental illness!
The thing is though, a re-alignment to more green technology could possibly be profit creating. I have no qualms with that as long as the ratio of investment returns is reasonable, and the consumers get a good deal (the new stuff works well and is reasonably priced).
The issue is about not wanting to change, worries about the cost of any change and an addiction to wealth extraction, not investment or longer term thinking.
I think you are right. The script will be written by a left wing Labour Party, much like the one we just abandoned. Mixed economy with strong state. But then the army were waiting on Westminster Green. That’s not a metaphor. They (almost) literally were. And those tanks would have made a terrible mess of the grass.
I agree with @ Jim Osborne – it would make a neat short video for YouTube, maybe as a precursor to the bigger project posted yesterday.
Speaking of which … I’ve since reflected and now believe the overall most effective way to get the message out would probably be via a dedicated YouTube channel. So forgive me for posting the following under today’s blog. Judging by the number of uploads attempting to explain different aspects of how economies function, there is clearly a continuing demand for answers out there in cyber-space. And instinct tells me using some form of entertaining animation would most likely offer the best way to explain what are in effect complex issues that make up the economic fabric of people’s everyday lives. A book, detailing all the topics covered, could follow.
By sampling just a few YouTube presentations (excluding all academic talks, lectures, etc.) you soon get an idea of what NOT to do. The problem is information overload, with an excess of usually American-inspired mis-information. Here are just a few random examples of different creative strategies. 6 years ago Ray Dalio (billionaire founder of Bridgewater Associates) offered a ‘simple’ explanation which has had almost 16 million hits (!) : ‘How The Economic Machine Works’ – https://www.youtube.com/watch?v=PHe0bXAIuk0&pbjreload=10. Then there’s the Robert Reich Q & A flip chart style : ‘The 7 Biggest Economic Lies’ – https://www.youtube.com/watch?v=mM5Ep9fS7Z0. And, in contrast, I note Neil Wilson has recently returned with a very basic approach that is also definitely not for mass consumption – https://www.youtube.com/channel/UC4yWHfpDoY_ojOAP_GFi52A.
Successfully penetrating such communication fog will be a tough challenge, that’s for sure. While the need is to reach out to as many ‘ordinary’ people as possible, unless they are basically interested in finding answers they’re not going to look, are they. However, there is always an opportunity to break through. As a management guru (Peter Drucker?) once stated: ‘The vacuum created by a cut in budget is filled by creativity’.
‘Cappuccino’ economics. And ‘Doughnut’ economics. Yummy. What’s not to like! Maybe you could pool resources and put together a co-operative, creative venture with Kate Raworth … and other like-minded academics (Stephanie Kelton?).
Well we all know each other…
Richard, You wrote a brilliant piece advocating a severe haircut to Wall Street in favour of Main Street. I must admit I had to take a sharp intake of breath. I thought this was an extract from the Morning Star, not Richard having another one of his Marxist turns. Careful now.
‘I might also add that those on the left who think we can do without the private sector(don’t) get this issue just as those who despise the state on the right do(‘nt). ??
Richard, I don’t know where you get much of your information regarding what many on the left believe. I expect there are differing points of view. Those on the left who do not want the private sector to play any part in the economy are very much in the minority. In early Soviet Russia by far the largest source of wealth (the land) was privatised; it was taken off the aristocracy and given to the peasants. Also, as part of the Labour Party’s last two manifesto’s Worker Self-directed Enterprises were to be encouraged; these are private, not state organisations.
There is a great deal of muddled thinking concerning State-v-Private. State enterprises not only feature in our Capitalist economy but also existed in Slave and Feudal societies. State ownership, therefore, does not imply socialism. Whether private or public either can be well or poorly run. The left is however, again often along with the right deeply hostile to private monopolies. Too big to fail businesses are poorly run. They are invariably criminal organisations. They get to be poorly run by capturing as much of the vital organs of civic society as they are able and trashing any opposition to their predatory practices. The power they exert feeds their hubris and disregard for the standard mores of humanity. That disregard for the traditional mores of society rests on the unequal property relationship that the 1% enjoy over and above the rest of us. Unfortunately, your Cappuccino model omits this unsettling perspective.Your model needs a little more than State & Private to function well.
I wonder how much buyers remorse features in the sub-consciousness of the British voter for their political choices in facilitating the nine years of Tory & Lib-Dem austerity. The austerity that goes hand in hand with the rise to dominance of Finance Capitalism. Both principal causal agents in our pandemic woes.
I get my information from many on the left who seem to despise anything that they think involves the private sector
I think that a mistaken view
I reject it
First time I heard the term was1998
“Marks & Spencer says retailing is flat but the same day someone pays £9 million for three London restaurants – a sure sign of a late bull market. It shows that the service sector boom rolls on. Cabs are scarce, restaurants booked out, theatres full. It is a cappuccino economy – froth on top and pretty indifferent underneath“
–Anthony Hilton, “The unhappy inevitability of a hard landing,” The Evening Standard, May 22, 1998
Wow
I’d never heard anyone else using the term before
I’m quite pleased at that
Profit motive is great for encouraging the froth, or sometimes the hot milk, but if you use it to make the espresso, you may well end up with something that smells like and vaguely tastes like coffee, but is decafeninated, and gradually gets more expensive and less like coffee as time goes on.
My mind is that we should have no worries with the private sector creating as much froth as they want, and hot milk to support the froth (e.g. the supply chain). But profit motive should not be involved in either procurement or management for the public sector. There’s also a question about resource allocation too, and who should be managing that.
A real world example would be the American prison system which is often privately run and has misaligned incentives, such as that it is now profitable to encarcerate more people than would otherwise be justified, and you end up with corrupt judges sending people to prison, so they can get payoffs from private prison companies who get paid for every encarcerated person. These encarcerated people then work below minimum wage for large employers, creating a perfect system of profit generation, but at the expense of any integrity at all. For example, the kids for cash scandal (though I expect this is the tip of the iceberg): https://en.wikipedia.org/wiki/Kids_for_cash_scandal
This is why the left is so suspicious of anything private in public services – because we see this happening all over the world, and the public sector seem to have no way to recognise or warn against misaligned incentives. Public officers are open to corruption, and in America, they seem to have reached the point where you can do it openly in public without anyone batting an eyelid.
I’ve worked for several companies that won tenders from the public sector. They did things which couldn’t have been done otherwise and had at least some sense of public service and civil duty. The owners of one ended up selling up to a larger PLC and becoming multi-millionnaires in the process. This was, as far as I was concerned, not progress, and didn’t improve the product or the company, providing less value to the customer. Our teams were perpetually understaffed, and later this seemed primarily to be designed to increase the acquisition price. And these were from owners who I believed to care about public duty.
On the other hand, the tender could have equally gone to companies which were all froth and cared only about money. How does a procuring public sector officer actually tell one from the other?
Most of the time, my experience was that the procurement of large services seems to go to those with the best marketing, or the “safest” option. That means, big, blue chip companies that appear to be able to do the job. Appearance is the key, whether or not it is a good job, is secondary. For example, Serco, Capita, G4S.. etc.
Main Street is seen as high risk, and unable to cope with large public contracts. Public sector managers are as vulnerable to glossy marketing as anyone else. How can that problem be solved?
Hi Richard.
I like the cappuccino analogy. It gives a different angle on things. The importance of a mixed economy.
It seems that a lot of the analogies that people come up with have a common theme of using fluids/liquids to describe the economy.
Whether it’s blood flowing round a body, oil in an engine, a cup of coffee or my plumbing version from another thread. (Even economists talk of “liquid assets” and liquidity).
As Kate Raworth points out in Doughnut Economics, being able to visualise abstract concepts, helps with our understanding.
With this in mind and plans for a video or book, would a good place to start be to decide on the best analogy? Put it out to the readership and see if a concensus can be reached. People could add tweeks to other people’s ideas.
For example, with your cappucino analogy above, layers could be added to it.
The cup is constantly expanding (growth) or shrinking (depression/slump). Could show how external factors such as oil price can effect the expansion of the cup.
Expresso and froth are constantly being added to the cup. (Expresso through government spending and froth through private loans)
To stop the cup from overflowing (inflation) expresso and froth need to be constantly drained from the cup. Expresso is drained through taxes which goes down the sink. Or temporarily removed to a second smaller cup for a set period of time. (Bonds). People who are persuaded to move their money to the second cup get paid to do it. (Interest on bonds) which means a constant drip of expresso is going into the big cup but not being spent by the government on public services.
Froth is removed when loans are repaid.
Ideal scenario is the cup constantly filled to the rim. (Economy at max output/employment)
Too much sprinkle isn’t always a good thing. It can make the coffee sickly sweet!
How do imports/exports effect the level of the cup?
There are lots of cups (countries) but they are all incased in a very rigid outer container (ecosystem) that can not expand. As the cups expand they press against the side of the outer container and eachother. Eventually the cups will crack.
I’m sure others could add other elements to your basic structure?
This could be animated with layers of complexity added bit by bit with examples of what would happen, say if the government lowered taxes etc.
In book form, each page can add another element to the picture.
Other analogies such as Mosler’s business cards are good at explaining how tax works between government and individuals.
Your thinking on many of those is remarkably similar to mine – here we are on a wavelength
I guess the problem is that as you get further into the detail a cup looks less like a cup.
Take the draining off of the expresso (Tax). It could be represented by a crack in the cup. This however suggests that it is unintended or accidental and also a negative.
A tap attached to the bottom of the cup would represent purpose/design and control of the draw-off (tax) but then the cup starts to look less like a cup.
Also the froth and expresso has to be seen to blend to reflect the “mixed” economy, rather than stratafication. (Government using private sector to build roads etc. Sections of private sector totally reliant on government contracts)
I guess you could represent this by dark brown at the bottom and white at the very top with a gradual shift in browns in between?
Getting the analogy right is key. One that allows for lots of layers to be added without over complicating the final design.
Or maybe that doesn’t matter. The final design will make sense to anyone who has followed all the other steps to get there?
I guess the problem is that as you get further into the detail a cup looks less like a cup.
Take the draining off of the expresso (Tax). It could be represented by a crack in the cup. This however suggests that it is unintended or accidental and also a negative.
A tap attached to the bottom of the cup would represent purpose/design and control of the draw-off (tax) but then the cup starts to look less like a cup.
Also the froth and expresso has to be seen to blend to reflect the “mixed” economy, rather than stratafication. (Government using private sector to build roads etc. Sections of private sector totally reliant on government contracts)
I guess you could represent this by dark brown at the bottom and white at the very top with a gradual shift in browns in between?
Getting the analogy right is key. One that allows for lots of layers to be added without over complicating the final design.
Or maybe that doesn’t matter. The final design will make sense to anyone who has followed all the other steps to get there?
PS. I just came across this by J D Alt. I haven’t read it but it might have some good ideas. I like the way he explains stuff.
https://www.goodreads.com/book/show/20567814-diagrams-dollars
He is very good
Hi Richard.
Just watched this video from J D Alt again.
His diagram is a really good starting point for a visual explanation of the economy.
The one big thing to add, is that the PS pot (as he describes it), is constantly expanding.
Some of the terms need to be changed for a UK audience and some of the explanation could be tweeked.
Also, the diagram could be a little better produced.
What do you think?
I have shared it here before because it is good
What do you think of his diagram.
Do you think it’s a good basis for the analogy?
It’s one way to do it
It sort of works
Maybe as well as any might
“Also, the diagram could be a little better produced.”
I haven’t re-watched the JD Alt before making this comment, but my recollection is that what I found unsatisfactory was not the graphic quality, but the fact that the water flow analogy doesn’t DO anything. It needs water wheels driving activity to my mind. Also it continues the myth of the reservoir of money which then flows through the system (to no purpose in the diagram).
I have long thought that electricity is a better analogy. Money flows in response to demand….like plugging an appliance into the mains socket. Without demand the electricity doesn’t flow, the flow starts when the ‘Hoover’ is plugged in and switched on to do some work. It is crucial to the working of the economy that the money is moving (albeit it is possible to store money for future use in ‘batteries’ which hold value.
Austerity is self defeating because it shuts off demand. Nobody wants to use the hoover so the house gets dirty and there’s no PPE when you need it……..
The difficulty with the electricity analogy is that most people have very little idea how electricity works…… but they do know (unlike James Thurber’s granny) that it doesn’t leak out of the supply sockets and flood the house.
I like the way you have expressed better than I have formed concerns about those diagrams…
Doh! Forgot to send the link!!!!
https://m.youtube.com/watch?v=bHQCjFebIf8&time_continue=1314&feature=emb_logo
[…] Cross-posted from Tax Research UK […]
“And most importantly, when drunk you can’t tell the component elements apart……”
Don’t you just love the English language 🙂
🙂
Not sure about this metaphor. I wonder who makes the cappuccino and who gets to drink it, without straining the metaphor too far. Whatever composition of coffee and frothy milk, there isn’t a country on Earth that isn’t damaging the lives of the vast majority through the toxic effects of inequality. What we know is that most people, despite working themselves into the ground, making up either the coffee or the milk, will never get more than a whiff of the cappuccino that a tiny number will need extra swimming pools to contain what they are given. States, the private sector and governments are not really the institutions and organisations that can provide for people. If they were, the world would be a place fit for people, and the evidence shows that it isn’t fit for the overwhelming majority. And I prefer black coffee.
For the record, mine’s a black Americano
Just saying…
And all metaphors have their limits
As is said, all models are wrong, but some are useful
Regarding the mixed economy, we no longer have one, do we? The share of public capital (public assets – firms, buildings, land , investments- net of debt) in national capital (public and private) in the UK has fallen from 27 percent in 1978 to around minus 7 percent in 2018. In other words we now have negative public wealth. (Piketty, Capital and Ideology, page 607, Fig 12.6).
“….we now have negative public wealth.”
Can that actually be true ? I’m aware that the public estate has been badly pillaged, but has it really gone that far ?
This is only on the basis of assuming all future pension liabilities have to be settled now
Accounting creates this sort of nonsensical claim under International Financial Reporting Standard
It does not mean it is true