Most people think that economics is about money, that government spending is constrained by tax, and that public services must always come second to “balancing the books”.
All of that is wrong.
In this video, I explain why money is not scarce, why governments create it, and why treating money as the central economic constraint has led to unemployment, inequality, wasted lives and environmental damage.
Economics is not about money.
It is about people, resources, care, and planetary limits.
When we put money first, we get injustice.
When we put people first, economics starts to make sense again.
So the real question is simple:
Do we want money in charge – or justice?
This is the audio version:
This is the transcript:
Economics is not just about money, and it's a point that has to be made because so many people think that it is, and that belief on their part matters because it shapes everything about the way in which our economy is managed as a consequence, and that is wrong. That error and what would replace it is what this video is about.
The widespread belief is that economics is about money and that government money is scarce, and that dominates the whole narrative about how the economy should be managed.
In turn, that belief that government money is scarce is based upon the idea that the government must manage the cash it has carefully on our part because we provide the money to the government, but that's wrong.
We don't provide the government with the money it spends; it creates it by issuing instructions to the Bank of England to make payment on its behalf and marking up its overdraft as a result, and this is a plain, straightforward matter of fact, enshrined in UK law.
There is, in fact, no such thing as taxpayers' money that the government has to manage on our behalf, because we don't even pay for anything with the taxes that we return to the government out of the money that it has spent on our behalf. The money that we return to the government is simply cancelled, destroyed, forgotten, obliterated. Once we pay our tax debt, that money ceases to exist. So the whole narrative that is explained about government and why economics is about a scarcity of money is itself also completely wrong, and this is massively destructive.
What goes with this belief that the government is short of money is a parallel belief that that shortage constrains everything that the government can do. Everything like job creation and healthcare and social care, and managing climate change, and education and defence, all those things that people want are treated as secondary because it is claimed that the government hasn't got the money to deal with these things. That's because balancing the books is all that matters in economics, according to most commentators now and according to our politicians.
But balancing the books is not all that matters. Let's just use an example. There is over 5% unemployment in the UK right now, but the government is refusing to act to address this fundamental problem. One in twenty people in the UK who want work do not have it because the government say they can't afford to stimulate the economy to provide the jobs that these people want. Meanwhile, the Bank of England is prioritising inflation control with high interest rates, which reduces employment opportunities at the same time, meaning that, apparently, inflation - a money issue - matters much more than unemployment.
The human cost of all this is barely mentioned; the financial cost is. Every priority is therefore wrong, but people are hearing the message, as a result, that unemployment is acceptable, and skills can be wasted, and lives can be put on hold and all because the books must balance and inflation matters.
I find this offensive. People come to the conclusion, as a result of these messages, that the economy is all about money, and money is the limit, and nothing else really matters except financial rules, but this is the mistake because the economy is not just about money.
In fact, it is very decidedly secondary. The economy is all about people. You, me, everyone we know and everyone they know, all of us together. When you add up everybody they know, and on and on, we are talking about the world as a whole. The economy is how we manage this planet, at the end of the day, albeit it's normally managed by country. What the economy is really all about is how we organise ourselves to meet human need using available resources for collective well-being. It's as simple as that.
And what are those resources that we have available to us? Well, they are people again, you and me, and our skills and our time, and our knowledge and the fact that we care. Those are the resources that we have, coupled with the real limits that exist within planetary boundaries and the risk of environmental damage, coupled with the human constraint, that we may not have some of the skills that we desire to be able to achieve everything that we want.
But money can't wish away these constraints, and that's key because money is not the focus of the economy; money is just a tool within the economy. It facilitates decisions, but it does not determine purpose, and yet most of economics seems to pretend that it does. So at the core of our economics, we have a fundamental fallacy that money is the be-all and end-all, when it isn't.
And that is the wrong story as a result, because the government can and does create money, as a matter of fact. In fact, one of the ways in which we can define the existence of a state is its ability to create a legal tender for use within its jurisdiction, and that it can defend the value of that legal tender by charging tax in it, which taxes are paid.
So money is not the constraint. It is, in fact, issued for public purpose, but if not enough of it is issued, which is the point that I am making, then public purpose is failed. The choice to constrain action, which is what is happening inside the economy because money is made the purpose rather than the tool, is that our ability to deliver what is good for our economy is being constrained by government voluntarily.
Now, I'm not saying that this does not mean that money shouldn't be managed; of course, it should be managed. If we try to spend money on things that don't exist, then we will get inflation, and that's not good news, and I accept that. But there's another corollary: if we spend too little money, which is what we are doing now, we get wasted lives; those one in twenty people in the UK economy at this moment who are not working when they could, if only the government was willing to spend more. We count the risk of inflation; we don't count the wasted lives, and I personally think that's well, immoral to be blunt, because lives matter to me very strongly and, in fact, of course, they matter to everyone. The fear of unemployment is much bigger in the population as a whole than it is of inflation; plenty of surveys prove that. So we need to find the right balances and the right priorities and make sure that we put emphasis on people, not money.
What we should be doing is addressing our current failures, and they are that we underuse labour and we overuse nature. We accept inequality and call it sound economics, and we allow obscene monetary inequality as a consequence, with power concentrated at the top as a result, and insecurity for most people, whilst there is permanent exclusion from society, for some, because they never will have access to the money that they need to participate.
We could raise the question, why do we accept this? Is it ignorance? Is it fear? Is it habit or is it power on the part of those who have money to ensure that their situation remains as it is now, and that they will always be secure, even if the rest of us are heading for gross insecurity?
Who benefits from this story anyway? It is, of course, those with excess resources; those with power, in other words, and those who command wealth and those who fear redistribution. Those who already have too much are, in other words, the only beneficiaries of the story that we currently have. No one else gains at all.
So the story that we have about how the economy is managed is one that is designed to ensure that the inequality that exists within it is perpetuated. That inequality does matter because it's toxic, whether it's within countries, and we do see that in the UK within regions, for example, or whether it's between countries, as we know exists because, of course, there are many countries in the world much poorer than the UK, although we have some pretty desperate poverty here now. And of course, we also have inequality across generations because those to come might well have to clear up the climate mess that we've created, and that is a matter of great concern to me as well.
Do we even care? That's the question. And why can I ask that question and believe that there may be no answer? That's because for 250 years, economics has been constructed to serve power. It has legitimised accumulation by a few at cost to the many, and it has ignored care whilst discounting the future by simply pretending it doesn't exist or it doesn't matter, and that there will be no consequences of current behaviour on future possibilities when we now know that's not true.
Our economics is blown apart as a consequence, and the truth is that we have to face that and the facts.
The facts are that money is not scarce. We could therefore organise our economy in a different way.
We could put needs first and not last, which is what the current system does, and outcomes would change as a result. We would have a different ordering of priorities, but can we change how we think? Can we stop worshipping money as if it is the real economic objective of life, when in reality it is not and should not be? Can economics serve everyone, and can we persuade the economic commentators to agree and talk about the failings in the current system, which means that people do not get what they need by choice of those in charge?
That's important because we need to change the direction of travel. If we do, economics becomes about well-being. The state has to accept responsibility, and that responsibility must mean that it should challenge inequality, and the consequence will be that our democracy would become meaningful again, when right now it's being hollowed out.
In summary, I'm not saying money is not important; of course, money is important. It is a fundamental tool to make these goals happen, but I am not, therefore, saying money is the most important thing; I am simply saying we must put it in perspective.
We are the most important thing, and our planet is the vital constraint on what we can achieve. Putting money first has made us forget both those things. We don't even care about people, let alone the planet, and so we need to change our priorities.
The right ordering is putting people and their needs first, putting the planet second, putting competent economic management of money and other such things third, and then, maybe, meeting wants, if there are resources available to achieve that goal for those who have some resources left over to make claim upon them.
These are the conditions for justice, and the question that we have to ask is, do we want money to be in charge, or do we want justice? That's the choice we have to make. That's the choice that will define our economics of the future.
What do you want? There's a poll down below.
Poll
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As you have always advocated, meeting need is always the first priority as meeting need removes it. Money is one of the means only.
Ayn Rand and her acolytes felt that you should ignore need. Not only was this immoral but it is also ahistoric in that it goes against what we know about human societies where meeting need was always about survival.
Followers of Rand are obviously those who are so rich that – infected with pleonexia – they have become decoupled from the reality of need. For theirs is an unnatural state of being anyway.
Thanks
I am so glad yoy keep using pleonexia
Word of the year?
Shouldn’t it be “pleaignorexia” !!!
🙂
I admit: I had to look it up! But it’s a good word as it makes ‘insatiable greed’ sound like a diagnosis – an pathological psychological condition, which is exactly what it is.
My thanks to Michael Hudson in his book ‘The Collapse of Antiquity’ (2023) if I am really honest.
I like Abba P. Lerner’s idea of “Functional finance”, an economic theory that states that government should finance itself to meet explicit goals, such as taming the business cycle, and achieving full employment. in a 1942 address, John Maynard Keynes’ summed it up quite nicely: “Anything we can actually do we can afford”.
Sources: “Functional finance” @ Wikipedia
https://en.wikipedia.org/wiki/Functional_finance
“Functional Finance and the Federal Debt, in Social Research”, vol.10 no.1, February 1943, page 44.
http://joseluisoreiro.com.br/site/link/f4a03d74be05d598ce39633e48604344996ea47d.pdf
“Keynes’ wisdom still stands; “Anything we can actually do we can afford.”
https://gimms.org.uk/2023/04/13/keynes-wisdom-still-stands/
Thanks
Except:-
“… from the late 1950s to the end of his life Abba Lerner worked on market anti-inflation plans (MAPS), due to problems he saw in industrial economies and theoretical problems with his earlier functional finance approach based solely on aggregate demand stimulation. Pushing the private sector to full employment just will not work. Effective demand analysis without structural analysis doesn’t show these problems, doesn’t understand the functionality of unemployment in capitalist economies. Lowe (1988) believed that the only way to full employment in a capitalist economy was with substantial public sector employment, he called it “planned domestic colonization”—that should go over well on the Sunday morning talk shows! He didn’t consider the need for increased public employment a bad thing, because we are in a perpetual condition of shortage when it comes to community services, public
goods, infrastructure revitalization, and the like.”
Pages 16 and 17:-
https://tools.bard.edu/wwwmedia/resources/files/928/WP%2016%20-%20Unemployment%20in%20Capitalist%20Economics%20-%20Forstater.pdf
Looks like I should read that….
“Human Cost” and “Planetary Cost” before “Money Cost” suprisingly is something the Green Party haven’t sorted out in their thinking! They’d better get a move on!
Agreed
I fully agree with you and would give this piece 5 stars if I could. But it’s discouraging how many people just don’t see it. This Monday, Matthew Parris had an op-ed in the Times, saying “Without public spending cuts the economy is doomed”. Later he talks about the country going bankrupt. The comments were disgusting; so many Times readers rejoicing in the idea of further impoverishing those on benefits. I put in my 2-pennorth about “country not like a household” and got jumped on. One person replying says that Singapore has a balanced budget and is doing well, so why can’t we? So depressing.
Agreed
It’s that ‘folk belief’ coming into play again.
In folk belief ‘economy ‘ means cutting back, watching the pennies. If you’re short of money you have to ‘economise’. And goodness knows, past and present governments have spent a great deal of time telling us that that the government is short of money and has to cut back.
Just as with the household budget myth, it’s very hard to convince people that the government is being economical with the truth.
I agree with what you say.
I agree that when tax is collected that money is, actually, destroyed. But, the current arrangements of government funding hide this fact. 🙁 This makes it much harder to understand what is actually going on and much easier to perpetuate the pernicious myth that taxes fund government spending.
What should happen, IMO, is that all spending should simply increase the government overdraft and taxes received should simply be totalled up and written off. The overdraft would grow large over time. Though this has no substantive effect, because the overdraft is interest free, it makes it look like the government is in debt. To avoid this, I suggest that, the overdraft should be written off annually, the amount written off being total government spending for the year.
But this isn’t what happens.
When the government receives taxes the government account at the Bank of England is credited with the same amount, which reduces the overdraft by that amount. What’s actually happening, IMO, is that tax receipts are indeed written off but, simultaneously, an equal amount of money is created and credited to the government account. This is disingenuous. It makes it look like money is being recycled, which it is not. It means that the deficit records the difference between government spending and tax receipts, which is not a useful number, but makes it look like the government is in debt. Then, for no good reason, the deficit is balanced by issuing bonds/gilts.
The myth of tax funding spending, of balance budgets, is a core pernicious problem. The way government spending and tax receipts are presented is misleading and perpetuates the myth. Even if and interested person tries to get the facts it is very confusing. I think it important to expose the falsehood of government accounts to dispel this myth. I have tried really hard here to put it clearly as I see it. Perhaps you could do better, more clearly, and reach a wider audience, with another post sometime, please?
Tim
I am baffled by this:
“What’s actually happening, IMO, is that tax receipts are indeed written off but, simultaneously, an equal amount of money is created and credited to the government account.”
I cannot see what you are suggesting happens. It does not, so can you explain your suggestion?
Richard
I’ll try to explain. My apologies I did not succeed first time. 🙁
I searched Google for “what happens to taxes collected by UK government”. It’s first (AI summary) comment was that taxes are recycled, flow through the treasury and BoE, and are used to pay for government spending. This is false of course.
It then says, “Tax receipts are paid into a Treasury account at the Bank of England, which helps clear the government’s own debt to the Bank, balancing the books”, for which it links to an FOI response posted by you in 2018.
It is this later which I say is disingenuous and confusing. If money is cancelled after being received as tax as, IMO, it should be, then it can’t be recirculated by paying it into a Treasury account. To me the correct explanation is that taxes are indeed cancelled but then the same amount of money is created and paid into the Treasury account.
Ok, so maybe I haven’t explained this brilliantly (I did my best). But the mere fact that we are struggling to agree does, I think support my suggestion that the real funding processes are being obscured.
I hope this helps. I’m happy to try further if you think it might help.
I am bemused Tim
The Treasury has an account with the BoE – as you have an account with a bank
The accounmt overdraft is increased by spending
It is reduced by tax lodgements
The debt is cleared
No new money is created – that whoh the overdradft re[resemted is destroyed
That’s it
There is npothing to recirculate – it’s gone
I cannot see where you think new meoney is created by the repayment. And tbis is not obscure – it’s very clear in fact
What am I not seeing that you are?
Perhaps it is my misunderstanding.
My understanding is that money is destroyed when it is collected as tax. To me, that means it can’t be used for anything else. Yet the government/BoE use that tax money, which logically has been destroyed as soon as it was paid, to also repay the government overdraft. I don’t see how that is possible if one believes, as I do, that money is destroyed when it is taxed back.
Now, obviously, the governments, account is, as things stand, being credited with a payment equal to the tax collected. That means that the government overdraft does not increase as much as I think it should when the government orders a payment. At the end of the year I think the government overdraft should increase by total government spending for the year. But, as things stand, it increases by spending less tax receipts. The only way that makes sense to me is if money has been created somewhere. As I see it, that money was created when the government’s account was credited by the amount of tax receipts, which shouldn’t have happened because that money was destroyed.
What is happening, I think, is that the BoE is being confused, both by those who run it and by the government, with a commercial bank, which it isn’t. In a commercial bank debits must equal credits, double entry bookkeeping applies. But a central bank can create money which can later be destroyed by tax. And those two processes don’t have to balance. To me that is a core precept of MMT. I think crediting the government account with tax receipts is an attempt to treat the BoE as if it were a commercial bank.
OK, I accept this is an unconventional view (hey, I’m neurodivergent). Perhaps it is wrong. But then I fail to understand how the process works at all; why does money not seem to be destroyed when it is received as tax?
If I’m wrong, and this confused, I certainly need help in understanding the process that is happening. That’s what I’m saying. That’s why I’m asking for a post.
Tim
The overdraft was the money.
The repayment is the destruction. That is it. That is how it has to be recorded – or the money would still exist and it does not.
And all of this can only be double entry. Your claim to the contrary is totally and utterly wrong.
What you are getting wrong is the imbalance is either :
a) A continuing overdraft or
b) Covered by bond issues
I can’t really engage more. You are putting ideas forward that are totally incorrect. What more can I say? Please follow what does happen. Please Google my work on the double entry of this.
Richard
I’ve thought of another, perhaps easier, way to explain my thinking. It’s probably an excessive post so please don’t hesitate to discard it if you think so.
Imagine a simpler, analogue, world in which money is represented purely as paper notes, with no electronic creation or destruction. This is logically equivalent to the real world of electronic money creation but more concrete, less abstract.
In this world, when the government makes a payment, the BoE revs up its presses and prints the required money. That money is then couriered to the recipients bank.
The BoE keeps a record of how much it has printed and calls this ledger the government’s overdraft. But this is of no real significance.
When tax is received in this world it is handed over at the tax receipt desk. From there it is immediately placed in the furnace at the back of the office and destroyed. The tax office is, therefore, a great place to keep warm in a cold winter.
In this world it is not possible to take tax receipts and credit them to the government’s account, because they have been destroyed in the furnace.
The government can credit its account, but only by first printing some more money.
To me this is a simple analogue of what is actually happening. From my perspective it seems the government/BoE must be creating money when it credits the government account with tax receipts.
Perhaps I misunderstand. If so, I’d really like to understand where my logic is faulty.
I have answered this.
The answer is just do the double entry. You aren’t.
To go along with ‘pleonexia’ I tried to invent a term for your ‘manage the world for people first’ philosophy; anthroponomics’. It had, of course, already been coined. It conveys your (and my) approach nicely.
While on this ‘words matter’ topic may I suggest either ‘Modern Monetary (even though, as I’ve noted before on this forum, it’s not all about money) Management or ‘Modern Monetary Practice’ as alternatives to MMT to deflect ‘it’s only a theory’ attacks. Apart from anything else, they are both usefully assertive.
Why not modern money?
Fair point. But it’s difficult to stick to. Three letter acronyms are seductive for a reason. And ‘Modern Money’ by itself leaves the question of Modern Money what? hanging in the air. It’s all a matter of taste/opinion I suppose. Just trying to help things move along.