The UK doesn't just have one economy: it has three. They are the real economy, the sustainable economy, and the monetary economy. However, the government is fixated on the wrong one. In this video, I explain why the real economy matters more than the monetary economy, why sustainability needs to get a look in, and why Rachel Reeves seems to have no clue about almost any of this, at cost to us all.
This is the transcript:
There are, in my opinion, at least three economies that the UK government should be worried about.
In my opinion, they're getting it all wrong because they aren't managing one of them correctly. And in this video, I want to explain what the three types of economy that we have are, why each of them is important, why the government is managing the wrong one, and what the consequences are.
The first economy that the government should be looking at is what I would call the 'real economy'.
The real economy is the one in which the real transactions, which underpin the world in which we live, take place. This includes all the activity that is paid for in the country, and all the unpaid work as well, and that last point is particularly important.
The real economy is not just about paid work. It includes all voluntary work, all care work, all self-help, and even DIY.
And what is more, it includes things like the learning undertaken by students for which they're not paid, but which nonetheless creates human capital.
The real economy is the one in which the foundations of life and well-being are really to be found. This is the actual world, and that's the one which matters.
There's a subset, however, of the real economy which we should also be taking into account now. And that's the 'sustainable economy'. Just as in the case of the real economy, this includes all the transactions that would take place within the economy, but in this situation, transactions are only undertaken if we can be sure that, at the end of any period, there's as much left over for generations to come as there was at the beginning of the period. In other words, the economy is sustainable.
Now we should be thinking about this because the UK government is committed to net zero by 2050 to ensure that this planet can continue with human life on it. I've no doubt that the planet can continue, by the way. But can it continue with human life? That's a question that a lot of people are asking. If we managed the sustainable economy, we would be future-proofing our actual transactions so that we would ensure that our children would have a fair chance.
And then there's the third economy that we need to consider, and that's the 'monetary economy'. This, of course, is the one in which everything is counted in terms of money. It is the world of accountancy. It is the world of big business. It is the world of government, but it misses vast amounts of activity that is undertaken in the real economy.
Much of the work undertaken by women in the household - and it is still mainly women undertaking that work in the household - or the work of the elderly in volunteering, or in looking after children for their own children, so, looking after grandchildren, in other words, or of students, as I've already mentioned, or even DIY and cooking and everything else; all of that is ignored by the monetary economy.
But more than that, the monetary economy is not just about creating well-being. The monetary economy adds everything up, whether it's good or bad. So things like pollution and the consequences of environmental disasters add to the value of GDP, which is measured in money, even though they're clearly negative for us because they have to be paid for, but not to actually provide any net gain, because they cause harm.
But despite that, this monetary economy, which doesn't reflect well-being, is our government's obsession.
Now, have a look at this chart, and you can see on here that I've put the three economies I've been talking about.
The circle on the left with 'X' in it is the sustainable economy. There's a reason why I've shown it as a circle, because the sustainable economy would be in balance with itself. In other words, there be no distortion because we're not using resources which are not available for us because they're required by future generations.
The real economy has 'Y' written in it, and it is distorted because we are using excess material resources right now to increase our well-being, but as a consequence, we're denying resources to people in the future, and we are creating climate change.
Because some things that are happening now would be different if we had a sustainable economy, I have not shown the sustainable economy as a subset of the real economy because we'd actually be doing things differently. So, quite deliberately, the sustainable economy is shown as not having a complete overlap, but actually it sticks out to the left, and that's because some things will be undertaken in that economy, which aren't done at present. They might well improve our well-being in my opinion, but the point is the world will be different, and nobody can pretend otherwise if that was the case.
And then we have the third area shown on there, and that's marked 'Z', and that is the monetary economy. It is a subset of the real economy, and that's clear, but it also includes transactions which do not get reflected in the real economy.
There are vast numbers of payments that take place that don't actually add real value to us, but which are redistributions of wealth within the economy in which we live.
So, for example, rents don't actually create value. They just transfer the wealth of those who are at work to the owners of property. But there's no new land as a result. And in most cases, there are no new buildings either.
And that's true of other things like interest. Interest doesn't add real value to the economy, although we pay vast quantities of it. What it does do is transfer wealth from those who work, and by and large, who borrow, to those who have wealth and who receive that interest. And there are plenty of other examples like that.
But the point is the monetary economy sticks out well to the right of the real economy because there are all these transactions that take place and which have to be managed, but which create no real value for us whatsoever.
In fact, my suggestion is that the real economy is shrunk in size by the amount by which the monetary economy sticks out in that area to the right of the real economy, because all the resources dedicated to these transactions, which add no real value, shrink the possibility of what we can actually undertake in the real world. But this diagram shows the three economies that can exist and which the government should be thinking about.
But when we look at the actions of people like Rachel Reeves and all her predecessors over recent years, we can have this alternative diagram. And the red area on here is the monetary spending of the government, and you'll see it is, of course, a subset of the total monetary spending within the monetary economy, because not everything is done by the government, and it is, therefore, obvious that this must be a subset.
But the particular point is that if that's the only part of the economy that is managed actively by the government, with the rest of the monetary economy having a sort of stick waved at it every now and again by the Bank of England via its interest rate policy, Rachel Reeves is doing nothing to manage the real economy at all. Nor is she doing anything very much to manage most of the monetary economy as a consequence of what she's up to. She just has this incredibly narrow focus of trying to manage the government's books. She's not managing any economy at all. She's just a glorified bookkeeper.
And there are massive consequences of this.
The government should, at the very least, be managing the real economy and not the monetary economy, and ideally, it should be managing the sustainable economy and trying to push things in that direction. But as it is, it's not even managing the monetary economy. It is just managing its books.
The result is the government neglects unpaid and care work and assumes it will go on without any intervention on its part, but places no value on it, which leaves large numbers of people undervalued and resentful inside our economy. It's ignoring planetary limits, and it has a narrow focus on deficits resulting in austerity, which shrinks the size of the real economy, causing deep social harm.
We have three economies, but the government can't even decide to manage the monetary economy, let alone the real economy. Instead, it simply focuses on managing its own books. And as for sustainability, that's an afterthought as far as it is now concerned.
It's time for us to understand that there are three economies within the economy as a whole, which we can look at.
It's time for us to demand change.
It's time for us to demand a government that focuses on what matters.
It's time for us to say, focus at the very least on the real economy and balance that.
And it's time for us to say, and while you're doing it, have a thought for sustainability, because our future matters.
What do you think?
We believe that this representation is fair.
We believe that the real economy is much more important than the monetary economy.
We believe that people matter more than bankers.
We believe that sustainability for our children matters more than depleting the planet now.
But what's your opinion? There's a poll down below. It's linked. Let us know your opinion.
Poll
Which economy should Rachel Reeves be managing? Total Voters: 201
Loading ...
Taking further action
If you want to write a letter to your MP on the issues raised in this blog post, there is a ChatGPT prompt to assist you in doing so, with full instructions, here.
One word of warning, though: please ensure you have the correct MP. ChatGPT can get it wrong.
Comments
When commenting, please take note of this blog's comment policy, which is available here. Contravening this policy will result in comments being deleted before or after initial publication at the editor's sole discretion and without explanation being required or offered.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
There are links to this blog's glossary in the above post that explain technical terms used in it. Follow them for more explanations.
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Buy me a coffee!
Take care of the real economy and the monetary economy will be fine. This has always been true in my 40 years of trading bond markets.
I also think Goodhart’s Law applies here, too – “When a measure becomes a target, it ceases to be a good measure”.
Interest rates, FX rates, inflation, Government deficits can all be important measures of whether the real economy is performing well… but when they become the target poor policy follows. Rachel Reeves’s “Rules” are a classic example.
Very true
I think you’re being generous to suggest the Government is managing its own books. It’s certainly not doing a good job of it. Any prudent management would as a minimum include investment to maintain the value of existing assets. With crumbling roads, schools and hospitals, etc. the Government is failing even on its own narrow terms.
True.
But that is all it is trying to do, and even that it’s doing badly.
I was looking at your first Venn diagram and a fair bit of X lies outside of Y, and then I went back and re-read that line
“There’s a subset, however, of the real economy which we should also be taking into account now. And that’s the ‘sustainable economy’.”
I wondered if John Venn, Hull’s most famous mathematician and contributor to Boolean logic might actually have been wrong.
And then it made sense. Thank you for providing your attention to this grey matter.
Thank you.
I have just come back from a week in Kent.
Looking a the state of many of the roads there I suggest that Rachel from Accounts has some bigger priorities in the real economy, assuming that she realises it exists
Unfortunately the political world isn’t the real world. I have just heard on Sky News Richard Tice Reform MP and Deputy Leader, say that running a Government is like running a business, a trope he kept using throughout, and saying that if Government does not follow the principles of business, it will go bust; like a business. The best way to explain this basic problem to Tice’s naturally constituency, is to put the matter as plainly and directly as possible; Richard Tice is talking tripe.
Richard Tice demonstrably doesn’t understand Government, or how Government and money work in the economy. This rubbish simply has to stop. This is the nonsense that, like the Financial Crash, Brexit, the appalling misuse of Government money resources over decades, the failure of tax policy, the absence of economic growth for twenty years, and all the other hideous neoliberal blunders; has all, inevitably brought us to …. exactly where we now find ourselves in 2025; in desperation, people listening to Tice, Farage, and utter tripe.
“ Richard Tice is talking tripe.“
Correct
Reform in a Nottinghamshire Council has banned its council members from speaking to a local newspaper. Tice has now backed the ban, arguing “a media organisation does have a responsibility also to present some things in a sensible way, presenting both sides of a debate or an argument. And that was the issue”.
Actually they do not have “a responsibility to present both sides of an argument”; newspapers certainly do not, and if political parties started to ban one-sided newspapers, virtually no politician would ever speak to newspaper. The media organisations with such a responsibility to balance (‘impartiality’ in the jargon), are terrestrial broadcasters, which are tied to the specific obligations of a Government broadcast Charter, or franchise. Incidentally, Tice’s analysis is so feeble, he also does not appear to realise that every issue is not binary; there may be more than two sides to any given political issue. But that would make politics too complicated for Reform to understand.
Tice is now making a garrulous and egregious habit of talking utter tripe.
Agreed
Often because of the desire to get to the point, we must make decision between a,b or c. When in fact the most appropriate decision is to prioritise choice dependent on circumstances while maintaining our aim. Military leadership doesn’t cover all scenarios but it caters well for many. This is relavant because the first rule for operations, “is selection and mantenance of aim”.
In my opinion, priority should be to manage the real economy such that it encompasses all of the susainable economy while restricting the moneytary economy to those activities that do not have a detrimental effect on the newly establish real economy. However, our constant aim should be to ensure that all of us have equitable access to the benefits of fairness.
Thanks
With all due respect, the first rule of operations should be ‘where is the money coming from/going’. Until you know that, you don’t know who the players are, what their next moves might, be, where their dependencies and vulnerabilities lie. This was THE major planning failure in AFG.
In many ways that conflict, and those like it, can be seen as a precursor to what is now happening in the US, and worrying signs of which are beginning to appear in the UK . Different wrapper, but essentially the same mechanics. It’s a global phenomenon, playing out differently according to the history and governance of different countries (and localities). I spent much effort explaining this to junior and mid-level officers in the early 2010s. They were generally curious, engaged – but there was no doctrine for the relationship between economics and conflict at the operational level; what was largely economic violence came under the rubric of ‘bad guys / extremism’. I could go on.
Rather than arguing over definitions of Fascism and comparisons to the 1930s, to my mind anyone with an interest might turn toward the lit on state failure, especially accounts written from experience in the midst of it. There’s a lot more in Defence and Security than big players, contracts, and black/white questions regarding govt ideology, a lot to engage with.
I’m not entirely sure that I agree with you, Joanna. My whole argument is that we need to look beyond money, important as it is.
I see your point, Richard – and in the overall national narrative, I agree. My point was a more specific critique of the conversation around international conflict within an organisation – the money side is almost completely left out, and this has proven a critically important omission. I should have made my limited context clear.
Otherwise, this description of ‘three economies’ is bang on – and a really valuable way of framing it. My original post was about how useful this is, but I became distracted….
Thanks
Understood
What’s missing in all the UK political parties is not understanding the central or true nature of the money device we use in our society. The clue lies in regarding it in the first instance as a “credit loop” as Christine Desan describes government creation of money in the following interview:-
“It has set up a loop of credit in which it’s issuing a unit de facto and taking back a unit.”
She also says:-
“… whether you spend the government’s promises into circulation and tax them back, or you spend the bank’s promises into circulation and tax them back, the government’s basically supporting and creating money that depends on its own credit loop.”
https://mronline.org/2021/01/01/money-as-a-constitutional-project-with-christine-desan/
What’s missing, however, in this interview is a much more accurate description of what money has to be and that it has to be a “Variable Credit Loop Device” or more simply a “Variable Loop Device.”
The “variability” has to be in there because the use of money is inescapably linked to demand. Demand therefore has to be looked at very carefully to see whether it’s leaking out in a manner that means this money device isn’t utilising all possible and rational use of real resources for an equitable benefit of all.
John Maynard Keynes pointed out that savings (like government securities) and the market rarely fully investing because of profit uncertainty are two sources of such leakage. Today in their book “Trade Wars are Class Wars” Klein and Petit point out another leakage source where countries like China and Germany suppress consumption mainly in the form of public goods and services in order to achieve price point in their exports to global markets. Of course there are other forms of demand leakage we need to identify. Here’s another old classic Henry Ford saying he wanted the workers in his car plants to get a decent wage so they could afford to buy one of the cars they were making!
Thanks
Here’s two other forms of demand leakage. Not paying an adequate Living Wage and ensuring that it’s enforced. Allowing the creation of money purely for pushing up financial asset values. I’m sure there are many others. The point is that if a society uses money as a credit loop device and wants to optimise the use of real resources for the benefit of all in that society it very much needs to be aware of demand leakages and that only government is available to monitor these and able to create variable money amounts to plug that demand leakage gap. When are Reeves and Starmer going to explain to us why John Maynard Keynes was wrong after all the private sector doesn’t balance its books it constantly contracts liabilities for itself, mortgages, bank loans, corporate bonds, shares, derivatives, etc. It demands the right to have credit loop variability and society allows it!
May I suggest that your entire Funding the Future archive – including the comments – be preserved in the UK Web Archive. As this post demonstrates, your work here is of real historic importance, setting out how political and economic structures might be re-aligned for the future. I’d be interested in your view, and also those of other contributors, some of whom may be well-placed to support or nominate the site for formal archiving once the UK Web Archive is accessible again. It’s out of action currently because it was hacked.
Is this the British library archive?
They were certainly archiving it.
I was thinking of this one, but maybe it’s linked to the British Library:-
https://www.nationalarchives.gov.uk/webarchive/
I’m glad to hear you’re being archived somewhere.
I can see no evidence I am in that one.
Really like yr 3 economy model, but wondered if the Monetary Model might have a subset representing the financial sector, Eg City of London and all its machinations? The financial sector sits as a parasite on the other three sectors as argued by Michael Hudson and Glass Steigall was a law introduced by FDR to control the financial sector from cannabalising the real economy.
The parasite is the bit out to the right. That is precisely what it represents.
Richard
Useful model for thinking about the UK.
It reminded me of something JK Gailbraith wrote about the economy having two parts. One was FTSE 100 type entities the other was the kind of small businesses that reside locally that we all know.
Two very different economies responding very differently to policy initiatives.
He was right
So am I
Both are useful maps desribing the terrian we face
I am so glad to see this line of thinking, and that the poll when I did it shows a majority for Real Economy. Up until now, money has been the measure for all to look at as a kind of proxy, a speed dial, engine heat gauge, rev counter etc. As the atmosphere fills up with C and mining firms scramble for low-grade ores previously ignored, and the numbers of real people suffering in tangible ways accelerates, the call is for politicians and policy to get real.
The contours of the new approach seem to be appearing in your writing: the non-monetary definition of capital, the economy as something beyond money, etc.
If capital can be real, then I’d say we can develop measurements of it against along the lines of maturity: that is, it performs to requirements without getting degraded. I’m trying to model this in Steve Keen’s Minsky model. So the pursuit of growth is replaced with pursuit of maturity. Getting real in other words.
Thanks