I have posted a new video this morning. In it, I argue that there is no magic to any government finding the money to do the things that we are capable of doing, because it can always create it by simply spending on these things we need – and then taxing that money back, if need be. Alchemy is not required for the government to do what is required of it.
The audio version of this video is here:
The transcript is:
Economics is not alchemy.
Alchemy was the ancient belief that you could turn things which were not gold into gold if only you could find the right formula. It was, of course, untrue. But, people as notable as Sir Isaac Newton thought it might be possible. In other words, even intelligent people can make massive category errors of that sort.
And our politicians are making massive category errors with regard to economics. They think that the whole subject is about what you cannot do. And that's not the case.
Economics is not about what you cannot do, which is the consequence of our politicians and, let's be honest, some of our economists, claiming that economics is all about the shortage of money, when there is no shortage of money, because the government can create as much of it as it likes.
Instead, economics is about what you can do.
Now, this is what modern monetary theory, to which I broadly subscribe, says most of all. Instead of saying, you can't do things, modern monetary theory reflects John Maynard Keynes, the greatest economist of the 20th century, who said, “Whatever we can do, we can afford”.
In other words, if it is possible to have clean rivers, decent hospitals, schools that aren't falling down, education that works, social care for those who need it, and so on - you can make up your own list - if it is possible to do those things because the resources to deliver them exist within our society, then we can afford to have them.
There is no constraint that is created by a shortage of money within government because the government creates all the money we have. Look at a banknote, see who made it, and then you'll see the answer to the question, “Who makes money?” So, in that case, this idea that economics is about what we cannot do is not right.
Economics is about what we can do. But we don't need to believe in alchemy to do those things. Because the possibility of achieving them exists because the government can enable them. In other words, we aren't, as Labour is trying to do at this moment, hanging their hat on the belief that somehow, in wild celebration of the Tories being out of office, business and consumers like you and me will spend so much more money that growth will happen.
Instead, economics says that, well, governments can deliver that growth by delivering the things that we really need. Like, as I've just mentioned, decent healthcare, education and so on.
So, there's nothing magic about economics. Economics is about what is possible. And we have to decide what is possible and what we want.
But nothing about economics says you can't have what we can do because we can always afford it.
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Hi Richard
“And our politicians are making massive category errors with regard to economics. They think that the whole subject is about what you cannot do”
I do not believe they are making errors, I believe they are simply lying. The one big lie that we cannot afford to improve the lives of the people of this country, maintains inequality, and keeps profits high in the financial sector. So long as we cannot afford to repair our crumbling hospitals, there will be a clamour for them to pay the private sector to do it (PFI), with the associated rip off costs.
Of course, if the Government created the money for the same thing, it would be distributed to building companies, workers, suppliers etc. – distributed through out society, reducing inequality as local spending power increased. Then no-one would see the need for privatisation in these lucrative sectors.
Regards
Agree entirely, Ricahrd, but there’s another fundamental dimension to this that brings in why it’s so important to recognise this whole subject as political economy.
When I first studied politics I was taught that a simple but fundamental definition was Laswell’s ‘Who gets what, when and how.’ This definition therefore underpins public policy making, which is what I used to ask my students to consider as a fundamental question of government when I subsequently became an academic.
The problem we’ve had in the UK, and indeed in most of the rest of the world, is that since the 1980s fewer and fewer politicians have wanted to engage with this question. Indeed, you documented this from a related perspective with your discussion of cowardly politicians in the ‘Courageous State’. I’ll give an early example, which was the outsourcing of the delivery of government services to so called ‘agencies’ back in the late 1970s and 1980s (the DVLA will be the one that most people know, but the prison service and probation are other examples). Thus, instead of civil servants, and above them in the ‘chain of command’, government ministers, it became the responsibility of the heads of the agencies (often with the title ‘Chief Executive’ to give the further impression that these were entities driven and managed in the manner of the private sector) if a policy failed to deliver what the government had promised. This despite the fact that government departments and minister routinely interfered in the day to day operation of agencies, as and when it was politically necessary to do so (or, as happened with the prison service, the CE was a little too outspoken (i.e. honest) about the shite position he was placed in by government policy). Incidentally, the NHS can also be seen as an ‘agency’ despite which Jeremy Hunt was well known for ‘interfering’ at an operational level, though always denied it.
This move to arms length control further took off in a big way with endless waves of outsourcing and privatisation through the 1980s, 1990s, and 2000s. All supposedly done in the name of value for money and efficiency (the ideological belief of all government since Thatcher being that the private sector is more efficient by definition – it isn’t) but in fact, further putting distance between government and politicians and the decisions and responsibilities that, in a democracy, are rightfully theirs. In other words, avoiding at all costs being drawn into an open, honest and transparent debate about who gets what, when and how, and why, and therefore having to answer difficult and uncomfortable questions about, for example, why £billions have been spent on HS2 with what appears to be hardly any cap on spending, while education, the justice system and social care have all gone to pot (government minister answer: it’s nothing to do with us it’s all down to the people running HS2).
Thanks
Some are no doubt lying, but I can’t help feeling that the majority have been brainwashed into thinking like good little neoliberals.
Loath as I am to praise a genocide supporter, the Biden administration has demonstrated the dramatic effect that government spending can have in delviering good economic outcomes for a country. America’s economy is in significantly better shape than the UKs, largely down to the massive programmes of government spending which have in turn increased private investment and job creation.
The whole notion of ‘homo economicus’ represents alchemy.
Predicating the entire edifice of conventional economic theory on the unicorn of a 100% rational being with total knowledge of all markets at all times is pseudo-science on a par with astrology.
Marvel comics have never done better.
Utopian free markets were never meant to become such rigid doctrine that their quasi economist priesthood could impose as universal truths, such as presenting the world with the “end of history”.
Fantasy assumptions and invisible hands have discredited economics for centuries, far worse than a mere category errors.
Unfortunately, people quite like fairy stories and are susceptible to magic.
Then there are outright lies, but which have had a connecting domino effect.
Joseph Townsend’s 1786 Dissertation on the Poor Laws used the fictional case study of dogs and goats on Juan Fernandes, the Crusoe island, to finally confirm the absolute inferiority of the poor. Malthus then based his theories on this false premise, and Spencer followed up with Social Darwinism, leading to eugenics and 20th C fascism.
We all know where that ended up, and are aware of its 21stC resurgence.
All these fictions persist and underpin so many current belief systems,
The inferiority of the poor, and especially the ‘undeserving poor’, is totally embedded in modern conservatism.
Sadly, alchemical qualities in economic thinking still exist.
Laffer curves, Phillips curves, ‘trickle down’ are all lycanthropic shape shifters.
And the myths about fiat money are yet another aspect of economo-alchemy, all designed to perpetuate a particular social and economic order.
Much to agree with
One of your best videos, Richard. It should be an essential part of all economics courses. I’ve added it to my armory should I ever give a talk again.
I have “liked” the posts by Sean and Bernard Hurley because I sort of agree, but I’m not convinced that all the politicians are lying. Most, I think, come in Bernard’s category of “brainwashed”. Groupthink as Bill Mitchell puts it. However, when it comes to the ones at the top of the pile – Prime Ministers and Chancellors in particular – I’m not sure.
The rich use a wide variety of shills to promote the scam that money creation is alchemy!
https://www.merriam-webster.com/dictionary/shill
Data on money for “shilling”:-
https://www.opendemocracy.net/en/dark-money-investigations/labour-conservative-party-donations-2023-spending-analysis/
Worth pointing out that Newton also became head of The Royal Mint……………
Excellent Richard.
This is a good background item on the source of your wonderful 1942 Keynes quote.
It begins here in the link…From The Listener, 2 April 1942
HOW MUCH DOES FINANCE MATTER?
https://www.bradford-delong.com/2020/05/john-maynard-keynes-how-much-does-finance-matter.html
Many thanks , Joe
Richard, I’ve used your Taxing Wealth report 2024 in letters to newspapers, saying here’s where Labour can find the money for e.g. a full Green deal and dropping the 2-child benefit limit. Then I saw criticism of your report from Dan Neidle, e.g. https://www.taxjournal.com/articles/wealth-taxes-debated .
Please can you respond to Neidle as I’d like to continue using your report saying there’s over £100bn p.a. available should Labour care to reform capital gains, inheritance and method, etc.
Thank you
He read one part of a report at the very early stage of publication
I never said we’d raise £170bn
I did there was under taxation and that this was one way to view that. But it was never reflected in the recommendations. It was simply a way of estimating the scale of the issue. It came with the caveat it was bound to be just an estimate
Neidle, as a small-minded pedant, ignored that. He ignored all that followed. But then you must remember Neidle must have made himself very well off serving the interests of the very wealthy as a very senior tax lawyer that existed t9 serve their interests. He gas never been a friend of tax justice for all, ever.