Commentator Stephen Fergusson has written this on the blog in response to the discussion on the ‘household analogy' of the economy. It reflects comments made by other MMT commentators, but is none the worse for that. I think it works:
Q: If a government is not like a household, then what is it like?
Having got their attention, we then fill that void with a CORRECT metaphor. What could that be? Might I suggest one almost everyone is familiar with: Football. So the response to the question would be something like….
A: Government is ‘like' the FA. Firstly, the UK government, like the FA vis-a-vis league points, is the ONLY entity that can issue £ sterling. Secondly, the UK government, like the FA vis-a-vis league points, CANNOT ever run out of £ sterling.
The metaphor is equally apt for many other aspects such as the FA will ONLY accept its OWN points (not EUFA Champion's League points, not gold, not Bitcoin, not anything else) in ‘payment' for the ‘tax' collected at the end of the season — when it zeros all the teams points in the table.
From there the message can be rammed home by contrasting and comparing the ludicrous ‘household' model vs the ‘FA' model.
For example, we might point out that that never in the history of Association Football has a sports reporter ever asked the FA “You've issued 350 league points this season, how on earth are you to going to afford issuing yet more points for this Saturday's fixtures?”
Similarly, never in the history of the game have football fans lost sleep over the FA's possibly going ‘bust' and being unable to sustain its ‘deficit'
Quite so.
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What are league points? I understood them to be 3 for a win and one for a draw, in which case the number is limited. Goals aren’t but yellow and red cards are so you must mean goals. If you mean league points the way i understand league points the analogy falls down.
There are unlimited potential leagues and so games and so points never run out so long as there is real activity (games) going on
Well saved!
That’s a good analogy similar to the one Warren Mosler has frequently used, viz. – http://moslereconomics.com/2011/07/30/mmt-to-congress-you-are-the-scorekeepers-for-the-us-dollar-not-a-player. For cricket lovers just substitute runs on the match scoreboard.
However, only this afternoon I tried to explain to fellow residents who were complaining about additional taxes for the NHS and, although they nodded, I could tell they simply couldn’t make the mental leap necessary. There is no quick & easy solution to overcome deeply ingrained mental constructs. It’s a ‘constant dripping’ process – possibly hastened by a collapse of the prevailing dogma. Also education from an early age, which is a very remote possibility in the UK.
“The difficulty lies, not in the new ideas, but in escaping from the old ones, which ramify, for those brought up as most of us have been, into every corner of our minds.” (Keynes).
Bloody Keynes: right again
Great metaphor Stephen Fergusson! 🙂 Warren Mosler would be proud. I think it’s something the majority of Brits are going to immediately understand. I don’t even like football and I get it.
I wonder, can we extend the metaphor by likening referees to commercial banks? Can someone with a better understanding of football help with this?
Referees follow the rules laid down by the FA in deciding whether or not goals should be awarded. They assess at the match level that teams are “goal worthy” in the same way banks are supposed to assess customers’ creditworthiness according to regulations set down by the government.
The board of the FA can’t possibly keep an eye on every single match played and judge whether goals have been fairly scored – they have to delegate that responsibility to referees. Positive Money’s proposals for the economy are akin to suggesting the FA do away with referees and assign both individual goals and league points from a boardroom somewhere – obviously bonkers. Not only that but Positive Money would suggest the Board of the FA no longer be directly answerable to share-holders or teams (I don’t know the organisational details of the FA).
Individual goals are much like IOUs – they only come into existence when two teams willingly play the game together and agree the circumstances are such that a goal has been scored. So a group of friends might trust each other enough to be able to play a match and happily score the game themselves with no need for an independent referee but professional teams competing for FA league points need unbiased referees because they can’t trust each other.
In the same way friends and family may be able to trust each other to create their own IOUs but strangers operating in the wider economy need an impartial 3rd party like a bank to ensure IOUs are issued fairly, recorded property and are legally enforceable.
It is easy to use the metaphor to illustrate how corrupt/incompetent referees or a corrupt FA would make the game of football less enjoyable and so it is with the economy when we have corrupt/incompetent bankers and/or corrupt government.
At the end of the day both the economy and football are both just games played according to rules created by humans. Some might say that’s a bit glib because the economy is a matter of life and death, but others (Bill Shankly) would say football is much more important even than that 😉
I like that, a lot
“…. the economy and football are both just games played according to rules created by humans.”
So, not Keynes, but Wittgenstein!
Slightly off-piste. I have been wondering for some time whether cryptocurrencies and blockchains could bypass state currencies, and allow complete evasion of taxation. Then I realised that state currencies have a second indispensable function, in addition to the payment of tax. The state need only enforce contracts based on an official currency. Yes, one can imagine companies using a blockchain system to completely conceal transactions from the taxman, but when such a transaction went sour, the state would be under no obligation to step in. The beauty of Adam’s football analogy is that it shows the importance of the refereeing system. The price of the state acting as referee should be that appropriate tax is paid.
I also question why we need to uphold tax haven contracts
Richard,
Is it possible that anyone, anywhere, is still imagining that a government with paper and ink (or electrons for that matter) will run out of money? What it may run out of is people willing to accept that money in exchange for their goods or labour. What it may run out of is resources. Growing the pile of resources ( overwhelmingly, human capital, I believe) is what we need to aim at doing.
Think of resources as the territory, and money as the map. Changing the map does not change the territory. A pretty good analogy I reckon!
The problem with the football analogy is similar. Yes, the FA can decide to give 30 (or 300, or 3000) points for a win, and 10 (or 100, or 1000) points for a draw. But what would that accomplish? The league table would be exactly as it would be otherwise apart from the trivial effect of the scaling. All teams would “benefit” equally: the promoted teams and the relegated teams would be the same. Unless we want the FA to decide who wins the league by deciding ad hoc what points to award…
On the other hand, once we create money MMT style, and then cancel it through taxation, we have to hope that the “teams” who receive the new money are exactly the same teams as the ones who pay it back, and to the same extent too. Unless we want the government to decide ad hoc who is to be made better off.
@ Cofe Baker
CB says: “Is it possible that anyone, anywhere, is still imagining that a government with paper and ink (or electrons for that matter) will run out of money?”
Yes is the simple answer to your question. There would hardly be a large thread on RM’s blog about the so-called household analogy otherwise. And the MSM wouldn’t keep tut-tutting on about Magic Money Trees, and that the government doesn’t have any of it’s own money, if they didn’t think they had a highly receptive audience out there for such waffle.
CB also says: “Think of resources as the territory, and money as the map. Changing the map does not change the territory. A pretty good analogy I reckon!”
Changing the map (money) does not change the territory (resources.) Regarding geography, that’s true enough, in as much as I’ve yet to hear of the French Alps for example being shifted to Frinton on Sea by human agency. But boarders change, and wars have been fought for those purposes.
Parts of France used to class as part of England until a certain young lass from Orleans decided stuff that for a game of monkey’s!
Surely whoever controls a territory and/or extends/changes it also controls the resources? Hardly seems worth the bother and effort of conquering and all the bloodshed involved if it were otherwise, unless you’re a total and utter nutter psychopath that is. Probably both a control freak and a psycho, come to think of it.
Also if the type of money changing doesn’t make a difference then how come the likes of Greece who opted for the Euro over their own money are now as stuffed as Joan of Arc didn’t want to be?
Instead of ‘Beware Greeks bearing gifts’ that should now read, ‘Beware, Greeks, of bearing gifts.’
The Euro, eh! The gift that just keeps on taking.
What the ….?
Cofe Baker,
No-one from an MMT perspective is suggesting the government suddenly start paying all existing staff and contractors orders of magnitude more than at present for the same services. That’s a straw man.
As monopoly issuer of the currency the government is the price setter (https://youtu.be/eNNaxi5ckz8) so, as you indicate, paying more for the same thing just increases the price level (devalues the currency).
Using the FA analogy what MMTers are actually suggesting is this: imagine the FA refused to award enough league points to allow all the teams who want to play league football to be able to compete. Then you’d have a number of teams, potentially entire divisions of teams, cast out of the FA’s league system.
You talk of human capital – well if the FA cut out the bottom divisions it would restrict access to League football for many youngsters. They wouldn’t develop their football skills because there is insufficient opportunity and motivation to do so. The entire FA league system would suffer over the long-term as talent goes undeveloped. British football would start to look less good by comparison to other national football leagues.
Same goes for the economy of course – needlessly restrict the money supply and some people will be left out of the economic game and fewer will reach their maximum potential.
The other point I’d take issue with is the idea that money is effectively a map of value in the economy. This is partially true in the sense that money is the unit of account but there isn’t a corresponding amount of actual money (financial assets, IOUs) for every thing or idea of value in the economy.
Say you own a house with no mortgage, a fully paid for vehicle and you have no personal debts. An accountant could estimate the value of your real assets and your “human capital” and that would be denoted in pounds sterling (the unit of account) but those pounds sterling do not exist – the accountant is just estimating the price of your real assets if you were to sell them or raise debt against them.
This is an important difference. For your money as map metaphor it means that financial assets including money is a map of the potential future(s); things that might yet come to exist – a new bridge or tunnel, an as yet unbuilt housing development, or a new power-station. Financial assets represents all sorts of as yet unmet promises. They are maps of potential future production.
The accountants’ estimates of value of real assets represents what already is and so is like a currently up-to-date map of reality – already fulfilled promises and production completed successfully in the past.
The really important thing is that because the modern UK economy is nearly entirely monetised very little change can occur without financial assets being called into being in order to motivate and coordinate the activity that will bring about new production.
It makes sense: if you restrict the quantity and types of promises people are able to make to each other you will obviously restrict the quantity and types of promises that people fulfill.
Hi Richard,
Sorry for going totally off-topic but I thought that you might be interested in this:
“A key recession signal is back at levels last seen during the financial crisis
The yield curve, which measures the difference between short- and long-term bond yields, hit its narrowest point since October 2007.”
http://markets.businessinsider.com/news/bonds/yield-curve-at-flattest-level-since-financial-crisis-2018-3-1019881594
Oops, Sorry once again.
The report above is from March this year. When writing that I had meant to add this link from late last week (but being in a little bit of hurry last night forgot to do so):
https://www.marketwatch.com/story/treasury-yields-retreat-ahead-of-ecb-feds-rate-hike-brings-yield-curve-in-focus-2018-06-14
(Last) “Wednesday’s rate-hike decision has flattened the yield curve, the spread between short-dated and longer-dated government debt. One measure of that span, the differential between two-year and 10-year Treasurys, stands at 37.4 basis points, or 0.374 percentage points, representing the tightest spread since 2007.”
The point of which is to say that the recession indicator that some of us noticed a couple of months is becoming more acute.
I read that at the time
I think the signs of recession are real and likely to be fulfilled
When the markets think that short term risk is higher than long term they are signalling that short term turmoil is likely
Given Trump, trade war, Brexit and more that seems highly plausible
What about friendlies where the activity takes place with no points involved. Is this altruism?
Hi Denis
I have no interest whatsoever in football so I asked my dad about friendlies as he’s a lifelong LFC fanatic.
Friendlies are not altruistic as spectators still have to pay to watch them. There main aim is to test out new players against both national and international players, to see how different combinations of players work together and to keep established players on their toes.
My dad explained that before the start of the football season Liverpool FC will go on tour to Australia, Thailand, wherever, and play a series of so-called friendlies. There’s no points involved in these games. However, the reputation of players, and their place in team when the season starts, is very much on the line. As such they are taken very seriously by players, if less so by many of the fans.
For instance, if Liverpool play a points match with Everton and lose, he’s 100% gutted. If Liverpool lose at a friendly with Everton he’s only 97.5% gutted.
Hope that helps.
Hi Denis again
My dad has just informed me that football teams do play some matches altruistically. These matches are called benefit or charity matches. The players play for free and the proceeds at the gate, and collection buckets, go to some cause/disaster/charity.
For instance, LFC regularly play Bayern Munich for charity. When LFC play at home, they keep 90% of the dosh raised to give to charity ( Alder Hay hospital,creating football fields in Afghanistan or whatever) and BM keep 10% for thier charities, and vice versa.
There was a match recently organised by Kenny Dalglish were new Liverpool players played against old ones. It was a full house and raised over a million quid for Alder Hay kid’s hospital. My dad’s memory is going so he admits he may have got the hospital bit wrong. I’d never even heard of such matches, which just goes to show how much interest I take in Football. I’m vaguely aware that there’s something called the World Cup going on, and that’s the extent of my knowledge and interest!
He has a gleam in his eye right now as I’m typing. I hope to god that doesn’t mean he’s about to launch in to trying to explain the off-side rule to me…. It does! Serves me right for asking him about football.
The difference with football would be that in this financialized economy, at the end of the match, the highest score has gone to the scorekeepers, and they have won. The two teams just have to go home and hope they do better next time.
Richard, Many thanks for posting my comment, much appreciated.
I use the football analogy because just saying ‘government is not like a household’ only achieves half the job. Media interviewers, and the audience, hear Mr/Mrs Progressive Economist say the words but don’t get the message. The result is the point gets completely forgotten – often within seconds – and the ‘debate’ veers back to the interminable ‘how are we going to pay for it’ treadmill.
Climate scientists have learned that to bust a climate denier myth they have to (a) refute the ‘sticky’ myth and then crucially, (b) they then have to then fill that newly created gap in the listener’s mental model with even stickier facts i.e. are simple, concrete messages that grab attention and stick in the memory. So, for the ‘household’ economic myth, enter the arresting and simple ‘FA’ model.
Please check out this fantastic, easy to follow ‘practical myth busting guide’ – by climate scientist John Cook (includes short video)…
https://www.skepticalscience.com/Busting-myths-practical-guide-countering-science-denial.html
[…] Fergusson, who wrote the comment I reposted on MMT and football league points, has provided another interesting comment in which he has pointed to the work of a climate change […]