I posted this Tweet yesterday:
The Tweet was, I admit, inspired by a comment someone made here, but in posting it I was not just making a political point about what priorities should be. I was also hoping to highlight a genuine economic point.
Rachel Reeves might think that economics is all about money, but nothing could be further from the truth. In fact, if you review most economic literature, money hardly gets a mention. There is good reason for that. In the standard definition usually offered, economics is a study of how scarce resources are allocated within our society. I think that a bit simplistic, but presuming that this definition, which will have been taught to all PPE undergraduates at Oxford, is accepted, then what is apparent is that economics cannot be about money. That is because in an economy like that of the UK, money can never be in short supply.
Commercial banks are at liberty to create new funds whenever they wish in the UK, subject to a regulatory regime that rarely constrains them from doing so. In any case, if such constraints do apply for any reason, as for practical purposes they did in 2008 and its aftermath and in 2020 and its aftermath, then the government can always make good the shortfall in commercial bank-created money to ensure that the liquidity of the economy is maintained. The pretence that economics should, as a consequence, focus on limited supplies of money is absurd.
Instead, economics should always be about the allocation of the real economic resources available within the economy. That should be the case whether those resources are the time of those available to work or the natural resources available for us to use subject to the constraints of sustainability, and whether those natural resources be as initially extracted from the world around us or whether they be in processed form, which is what we usually describe as capital.
In that case, what I have described as fiscal rules in my tweet are exactly that: they are some of the minimum considerations that should apply to ensure that fair allocation of resources takes place within the economy in which we live.
The world would be so much better if Rachel Reeves agreed.
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A rock star self imbued with drugs and alcohol falls from a balcony in Argentina and makes the news.
Queues at food banks daily go unrecorded and we get programmes about yachts instead.
Something is very,very wrong about money and the world.
You are rightly focusing on outputs. Those are the results that really matter to people.
The Treasury and other government departments control inputs. That is why they like to say they have (or will) spend X on this, or recruit Y people to do that, and implying that desired results will follow without pledging what those results will be.
Much of the time, is it far from clear that there is any direct and causal connection between inputs and outputs. It is not a deterministic and linear system. Even if there a connection, it can take the perimeter of the state supertanker a long time to respond to tweaks to the central throttle and the rudder. And some parts of the complex nonlinear system may indeed respond in an unexpected, unintended and potentially counterproductive manner.
But it is good to set targets and try to achieve them, rather than wandering blindly around in the dark.
The focus on money, explains why since 2010, life expectancy in the UK has ceased in long steady improvement, and UK children are not growing as well as our European peers, and we have such large proportion of the population economically inactive due to poor health.
I’ve yet to see the architects of finicial disaster compensate the public in any way for saving them from collapse, rather the opposite.
Good morning Richard,
I agree with your earlier tweet. On reading it I was reminded of the speech given by Neil Kinnock on the eve of the 1983 General Election. (Forgive me if I have used it out context. I was 5 years old at the time of the speech)
“If Margaret Thatcher is re-elected as prime minister on Thursday, I warn you.
I warn you that you will have pain–when healing and relief depend upon payment.
I warn you that you will have ignorance–when talents are untended and wits are wasted, when learning is a privilege and not a right.
I warn you that you will have poverty–when pensions slip and benefits are whittled away by a government that won’t pay in an economy that can’t pay.
I warn you that you will be cold–when fuel charges are used as a tax system that the rich don’t notice and the poor can’t afford.
I warn you that you must not expect work–when many cannot spend, more will not be able to earn. When they don’t earn, they don’t spend. When they don’t spend, work dies.
I warn you not to go into the streets alone after dark or into the streets in large crowds of protest in the light.
I warn you that you will be quiet–when the curfew of fear and the gibbet of unemployment make you obedient.
I warn you that you will have defence of a sort–with a risk and at a price that passes all understanding.
I warn you that you will be home-bound–when fares and transport bills kill leisure and lock you up.
I warn you that you will borrow less–when credit, loans, mortgages and easy payments are refused to people on your melting income.
If Margaret Thatcher wins on Thursday–
– I warn you not to be ordinary
– I warn you not to be young
– I warn you not to fall ill
– I warn you not to get old.”
Prophetic speech from Kinnock. Look what the modern day Labour Party has become.
It was a very good speech
This speech deserves a lot of repetition, particularly in the ears of our Government.
The idea that money is a scarce resource is not a fact, but a conclusion from an analysis of people’s behaviour.
And if we are talking about behaviour then we are talking ethics.
Do people consider that money is commodity. Are we to only consider money and nothing else when talking of balanced budgets. Are we to limit our thinking and restrict ourselves to the realm of a perverse utilitarian marxist. Should we choose to worship money?
Been reading Dan Davies’ The Unaccountability Machine and it’s impossible to read this passage regarding “Accountability Sinks” without thinking about Reeves’ fiscal rules:
“The principle of diminishing accountability: Unless conscious steps are taken to prevent it from doing so, any organisation in a modern industrial society will tend to restructure itself so as to reduce the amount of personal responsibility attributable to its actions. This tendency will continue until crisis results.” (He clarifies that this principle is too simplistic though.)
(The book also literally addresses fiscal rules as an accountability sink with regard to the EU’s Stability & Growth Pact.)
‘Commercial banks are at liberty to create new funds whenever they wish in the UK, subject to a regulatory regime that rarely constrains them from doing so.’ And when commercial banks get too exuberant and create too much new funding for dodgy loans they go bust.
https://www.bankrate.com/banking/list-of-failed-banks/?tpt=a
So?