In this morning's Economic Truths series video I suggest that it is an economic truth that every action has a reaction, and yet economists and politicians often ignore that fact by pretending that some forms of government spending - and most especially benefits – deliver no useful outcomes at all. That's not true, but what it says is that this process of thinking about reactions requires their serious attention.
The audio version is:
This is the transcript:
Every action has a reaction. Physics teaches that. So should economics. Because it's as true in economics as it is in the physical world.
Why? Well, if I spend money, someone gets it.
If I do something for somebody, they benefit.
It's as simple and straightforward as that.
And we know that this is the case because in the world of accounting, which records how the real-world works - more so than any economist has ever managed to create a model to do - there is a system called double entry bookkeeping.
And double entry bookkeeping exists for a very good reason, and that is because it understands, in a way that most economists do not, that every action has a reaction. Because economists don't understand this, they actually put forward the idea, very often, that some forms of spending do apparently disappear into black holes, and are of no great benefit to society.
Politicians mimic this. They will go around saying, this money is wasted. They'll talk about benefits in that way, in particular.
And our economists at the UK's Office for National Statistics actually make up sets of accounts for the UK which deliberately don't balance because they don't recognise that every action has a reaction, and they will not use double entry bookkeeping to prepare the accounts on which the decision making of our government is undertaken.
That's absurd because it does allow for this stupid idea that somehow or other some economic actions are purely beneficial and others are a pure waste, when in fact every action has a reaction.
So, for example, when the government spends, it isn't money poured into a black hole. Although, over the decades that I've been listening to politicians, you would believe that is the case. Instead, every time the government spends, somebody has income. Straightforwardly, simply, they have to because that's the other side of the equation. Government spends, someone has income.
When that somebody who gets income spends, somebody else has income, and on.
Now the point about this is that we cannot think, therefore, of any government action, or any action in the economy at large, in isolation. We always have to imagine what the reactions are.
And I would stress that the reactions come in two forms. One is the obvious financial consequence of the action that is being taken. So, if the government spends, as I've already said, somebody gets an income.
But suppose the government spends most unwisely on, for example, creating a new coal mine, as our last government intended to do, and which has not yet been cancelled by the current government. That coal mine would produce pollution: unacceptable levels of pollution, either in the UK or wherever, when the coal that it brought out of the ground was burned.
Now, the reaction is measured in the terms of the wages paid to the miners and so on. But it's also the cost of the pollution.
So, we have to think about the first, and second, and further consequences of any action as well. It's not acceptable for anyone to only think of the immediate reaction when proposing a policy. They have to consider the further consequences of their actions as well.
Now, as grown-up human beings, that is what we learn to do. Children might think, I can hit somebody without worrying about the consequences. As adults, we should have learned that we can't hit anyone without thinking about the consequences, and there are lots of them. We understand that implicitly and reflect it in our behaviour. But economists and politicians don't seem to when it comes to managing the economy.
So, what we need to do is take the lesson from accountants and understand that every action has a reaction and think about what the immediate financial consequences of anything that is planned might be. But we need to be a little more mature than that as well, and we need to go beyond that purely financial measure of reaction and look at what the further consequences of our behaviour might be, and choose the best courses of action that are suggested as a consequence.
This is mature government. This is mature management. This is mature thinking, and I just wish we saw it in use.
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An economy is a complex construction. What hope can we have to take into account second or third order effects if we don’t even recognise first order effects?
Another mistake is to see everything through a financial lens. Many activities have benefits in other ways than purely economic. What value do we put on the environment or on social cohesion or on health and wellbeing, for example? We end up worrying about the price of everything but understanding the value of nothing.
Agreed
Starting from these thoughts from Richard, I would like to propose that there is an addition to the budget the Chancellor produces anually. That is for there to be an analysis of the resources needed to satisfy the budget expenditure and where they are going to come from; including whether or not they are they met by imports, or from within the country. It would also be instructive to know the impact on the environment.
I realise that, at the moment, there probably isn’t the information available to do this. But in my view, it should be. It could be a task for a separate department and its output would show just how responsible and achievable the budget truly is. Cause and effect would be clear to all.
I like that
1st August was Earth Overshoot Day – when mankind goes into debit in terms of resource consumption.
Dependent on your national location and the nature of your consumer society, depletion days vary.
In the UK is is 3rd June.
This basically means for 6 months of the year we are consuming resources that are not capable of renewal / regeneration, and beyond the capacity of the planet to absorb indefinitely.
How long that can continue is blind eyed in economic development.
Resource appraisal ought to precede ALL projects and developments, infrastructure or services in all areas of human activity
Quantity surveyors do it every day, as do production engineers and architects.
In pre-planning, all my own environmental project evaluations included the following metrics as basics, as well as costing –
Materials / Transport / Labour / Management / Time
At a national level, a simple systems analysis would classify materials as non-renewable or renewable..
Embodied energy is a standard measurement in construction materials, and that can be added too.
It is a very simple and logical way of thinking.
Much project management mapping is just plain common sense.
Processes would be mapped as flow diagrams against stocks.
Externalities could be included at the outset.
If only we did have a full systems approach, then sustainability would be much easier to integrate, and comprehensive environmental impacts used as assessment criteria.
The nihilism of Runtonomics – “ if we can’t afford it, we can’t do it.” actually does work at a resource management level when looking at resource depletion and pollution, but if you are not even measuring consumption and environmental impacts you are in trouble.
Conversely Keynes’ optimism of “Anything we can do, we can afford” might work as an economic mantra of hope and rebirth, but it certainly does not at an environmental level.
There really are limits to growth.
The Limits to Growth have already been exceeded. We are on course for over 3°C of warming, the effects will make modernity as we know it a thing of the past.
Professor Tom Murphy covers this very well, but it is scary af:
https://dothemath.ucsd.edu/2024/02/unsustainable-goose-chases/
Or perhaps the other way round – an annual audit of all resources available to Government and how these best be deployed for the benefit of Society. For is that not the purpose of a budget anyway? A much more an ‘if we can do it, we can afford it’ approach
Assessing where resources are going to come from starts to sound like a major bureaucratic exercise and ‘shades of’ central state planning.
A lot of the resources needed will be human – skilled workers – but given that we seem to be incapable of planning for and training adequate numbers of even limited types of professionals, I have my doubts that it’d work, in our current ‘culture’. But we could – and should – try.
Is there soemthing wrong with planning? It seems that’s only so when it’s done by the government
Change the terms of reference for the Office for Budget Responsibility would maybe go some way towards your suggestions
If we agree with the Wiki that a budget might be defined as “a spending plan based on income and expenses. In other words, it’s an estimate of how much money you’ll make and spend over a certain period of time, such as a month or year.” then we shouldn’t be referring to what happens these days as a budget at all. Perhaps too the office of Chancellor is no longer appropriate either. New thinking to reflect our current actual position is needed here.
Many thanks for this series. I’m appreciating it greatly. It simplifies without patronising – which is a great gift.
It should be part of the school curriculum and/or an ‘Introduction to Economics’ in Current Affairs type courses. (PSE, perhaps, alongside double-entry book-keeping and budgetting.) With time for silly questions like “Yes but once the demand part of supply and demand goes down what do the suppliers do? What about their employees?” (This was a long time ago, because now you can see it happening. So you know. “They create another must-have, silly!”)
I took a course which had an Economics element a loooongg time ago. It wasn’t immediately apparent what Economics was doing there, and nobody seemed to explain/question that it was. It was very hard work and I still don’t grasp all the economic theories and jargon. My brain kept slipping away.
TBF, my struggles with numbers/percentages (I’m dyscalculic) graphs and charts (head injury) weren’t the lecturer’s fault. The amount of concentration needed was tiring though. Plus it was very condensed, so he was expected to present too much in too short a time. Not really any time left for applications or ideas. And it was only a small (and, relative to the rest, seemingly ‘unimportant’) part of the larger course. I could see that a lot of the other students certainly thought so. It must have been disheartening..
It should also been shown to MPs as part of their induction. Attendance mandatory.
I wonder if all those Honourable Members (who don’t always seem to be honourable, but do often appear to be members…) who studied(?!) PPE have the same attitude as my fellow students. Did they separate out the 3 parts? Politics – well that was the plan, wasn’t it? Philosophy – you can say what you like, can’t you? Economics – well, you can just ignore that. You’re never gong to need it. Plus it was a useful general degree, a doddle to get in (even at Oxford) and you Made Contacts.
Maybe the course was mostly theoretical with no side-tracking from the academic study into real world applications. Mind you, I may be being very unfair here, but most of them don’t seem to have the kind of mindset that would recognise the reaction part of the book-keeping if it smacked them in the face with a sledgehammer. Or worse, they have considered the outcomes and don’t care. Or are the ones like the Britannia Unhinged crowd, who did form ideas, even worse?
A lot of your thinking might be well on the right track
Have you been a listening to reggae again?
I am sure that the title of this post is a line in Bob Marley’s song ‘ Satisfy My Soul’ – which this blog does BTW.
Accidental, in this case
I don’t think I know that song
I agree that double-entry bookkeeping was a splendid invention, and that almost everything in the real economic world must fit to this. However, what about invention/innovation? Effects without financial causes, in the first instance. As the invention is developed, double-entry can be applied to costs and revenue, if any. But the initial push is outside the reach of finance?
Of course it is
But that does not change my suggestion
Very obviously the UK educational system is poor because of the insufficient emphasis on thinking about the consequences of our actions. As a result we vote politicians into office who are ill-prepared to govern believing largely their shallow nostrums are adequate. Often of course they deliberately are because of the corrupt nature of some politicians. At the end of the day corruption or not we must now contend with global warming and thinking our actions through is fast becoming a necessity!
https://static1.squarespace.com/static/53568703e4b0feb619b78a93/t/5367981ce4b0124f24031674/1399298076240/the-entanglements-of-humans-and-things-a-long-term-view.pdf
This ‘simple’ accounting idea that all spending has to go somewhere is probably Richard’s most powerful and potentially ‘cut through’ idea. But there is still so much resistance to it . ‘No money’ Rachel Reeves is among the worst .
But there are Input-output tables – showing the flows between sectors of the economy which do exist and are published each year – and which some people have extended to include physical ‘carbon’ flows, and investment (‘capital’) spending to simulate how an economy grows from year to year.
It’s sort of strange that the ONS -produced IO tables seem to have no connection to or influence on the ‘mainstream’ economic/political debate – so politicians can still suggest ‘public spending’ is a synonymous with ‘waste’.
Rachel Reeves’s “black hole” is effectively an ignoramus’s admission she has no idea where money goes! For a politician who has two economic degrees and a stint working at the Bank of England this tells you the country is educated and run by idiots and venial individuals as far as economics is concerned. It’s that simple. Socially and economically the country is therefore being persistently undermined. I think of it as “deathwatch beetle economics and capitalism”!
It would seem as Richard says a main response has to be to educating people to understand double-entry balance sheet accounting. This is peculiar when you think about it because every bank loan creates a deficit and though ultimately it tends to get paid back too many loans in aggregate run the risk of triggering inflation as we’ve seen for over five decades in the housing market.
I am pensioner age 75 living for over 40 years in Caithness.
Your diagnosis of the reduction in government spending is entirely correct in my view.
Taking the withdrawal of the heating allowance the consequences of the multiplier affect in reverse will hit an area like mine and many others drastically.
Caithness and indeed most of the Highlands and other rural areas has a hugely aging population.
Sin brief I think the removal of the allowance is much worse than it may seem at first. Your analysis is correct but lets take what I will do to illustrate it. I will lose the £200 allowance ( I can afford it personally) but to counter it I will save £200 extra to make up the difference. £200 pounds with drawn from my spending may not seem like much but in an area with preponderance of elderly people will be more dramatic in rural areas than say large towns or cities.
Wick where I live currently has many closed shops and a growing number of businesses up for sale some finding it hard to find a buyer. Any withdrawal of spending ability in town centres by older people will just add to the woeful consequences already killing town centres and may be speed up by this latest announcement for pensioners.
I have spoken to few older people and most seem to think they must save more – not just for this latest hit but the cost of living generally. The economy cannot afford say 10 million people spending less – as you rightly point out.
The idea that you can give it to people on pension credit and the problem is solved is not logical. Better would be to do it over years and let it wither on the vine but give more to people on benefits. At least that way everyone would get used to the reduction over time.
As you have regularly pointed out and in your Wealth Report there are several ways to raise income.
Thank you, and much to agree with.
It is some time since I visited Wick. I am sorry to hear of its problems.