Rethinking Economics

In 2008, in the wake of the Great Financial Crash, students at a number of UK universities demanded to know from their tutors how economics profession had so badly misunderstood global economic dynamics and been taken completely unawares by the disaster.

Since then there have been economists around the world exploring that question and within Islington U3A I have been facilitating a Rethinking Economics Book Group exploring some of thier work. Along the way we have come to believe that Economics is so far from being an authoritative body of knowledge that it does not warrant the hold it has over governments, that it is largely Politics with numbers attached, and that until it reconfigures itself to encompass insights about the dynamics of complexity it will continue to take us all down a path to ecological ruin.

Of course we are able to reach that view because we are complete amateurs in the field!! We are not demanding that you share it, but we are offering on this page some thoughts prompted by our reading and our dicsussions which we hope may encourage you to at least ask some questions of any economist you hear or see in the media.

Here you will find arguments on:

How much money do wise governments spend?

Nobody wants inflation – or do they?

The roles of the State in decarbonising the economy  

We’re still influenced by decisions made in the 17th Century – isn’t it time we weren’t? or How the ECB could have prevented the devastation to the economies of Greece, Portugal, Spain and Italy

Do we believe in magic money trees now?

How much money do wise governments spend?

We are often told that governments are borrowing too much, and that this is bad for our economy. Is this true?

Governments must certainly ensure our money system is working well, and government borrowing is part of that, but how do we know how much is too much? And what else do we need to look out for when we are assessing how well they are looking after the money system?

To be able to answer that we first need to consider what we, as a society, need money for: what can we do, now that money exists, that we couldn’t do before it did? Then we can look at how governments can ensure that money fulfills all those roles.

What do we need money for?

Most obviously it enables us to easily buy and sell things and to be paid for our labour. It’s a myth that money replaced a system of bartering (there’s no historical evidence that barter ever took place on a widespread basis[1]), but it did supercede a system based on promises – from which the term ‘credit’ derives. So one of its roles today is as a ‘medium of exchange’. That’s an important role but not its only one. What are the others?

We all work for some of our lives but not all. In childhood, sickness and old age we rely on money we (or our parents) have put-by in times when we earned more than we spent. Our money therefore needs to be kept safe for quite long periods of time when we’re not using it. One of the functions of money is there described as a ‘store of value’.

We can see a third role for money when we observe that, as the Industrial Revolution took place, projects emerged that required upfront investment for longer term, not always predictable, returns. This offers people who have money they are not using the opportunity to lend it to others in the hope of generating more of it. We can call this its speculation role

A system of money that fulfilled these three roles emerged first in Florence in the 1400s, spread to Holland, and came to the UK with the ‘Glorious Revolution’ of 1688. This new system, manifest in the establishment of the Bank of England in 1694, was a major contributor to English global supremacy in the two centuries that followed, and was a major cause of the Industrial Revolution and British Imperialism.

A country’s money system today still needs to fulfill these important three roles. Any government needs to ensure that it does. But who is best placed to oversee such a system? A nation’s government? A nation’s central bank? The commercial banking system? A mixture of all three? What sort of decisions need to be taken? What sort of information would decision makers need and seek?

Decisions about inflation

If there is more money in circulation than there are goods to buy or productive projects to invest in, then inflation results; people effectively bid up the price of things without the underlying value rising. This hurts those on fixed incomes (although not anyone else) and for them money becomes an unreliable store of value. So governments and banks making decisions about investments need to assess the capacity of the economy to absorb additional revenues and avoid inflation –  while they also think about the likely financial return on those investments, and additional benefits such as jobs, and goods and services that add value to people’s lives.

In the extremely rare instances of hyper-inflation, money’s role as a store of value disappears altogether – which is devastating for everyone.  Perhaps as a result of their fear of this almost all governments have given their central bank a mandate to control inflation. Some (like ours) have made it the single mandate, others (like Germany’s) combine it with a responsibility for unemployment levels.[2]

Decisions about borrowing

We are often warned that governments are ‘borrowing too much’, but we must always remember that money exists in a relationship between two people: one person’s saving (investment in a safe financial vehicle) is another’s borrowing. So if we say that the government is ‘borrowing too much money’ we are also implicitly saying that ‘too many people are saving by buying government bonds’. Does it make sense to say this? Why would people do that? Because they are looking for safe, sustainable, returns on their money, to be able, for example to fund their pensions. If they are choosing to invest in government bonds they must be unable to find companies investing as wisely in projects with sustainable results. If so, this is a failure of big business, rather then governments.

Both savers and citizens need to see a government investing in a wide range of long term projects which will increase the wealth and wellbeing of the country in ways that only a government can: spreading the risk over a wider range of longer term projects, and over the whole tax payers base. If people don’t have access to this kind of investment, and if businesses too are hoarding money and not investing for the long term, then savers will instead fuel asset price booms by investing in assets like property or gold. So if its nonsense to say that too many people want to lend to the State its equally nonsensical to say that the government is borrowing too much money. The issue is not how much is being borrowed by a government – but what it is being invested in. This is where voters (and good journalists) should be focusing.

Ensuring wise spending

The same is true for the rest of us: its vitally important that we only borrow money to spend on wise investments. Businesses too. How can a government encourage that? It should keep an eye on the cost and availability of credit.

A sound economy relies on credit being two things: tightly controlled and cheap.

  • Tightly controlled: only lent for high quality (worthwhile) investment and not for day to day spending.
  • Cheap: at interest rates low enough for people with worthwhile projects to be able to bring them into being.

If we look at our system of credit today, we see that credit is urged upon all of us, in every department store we visit, in TV ads, approaches from banks etc. Furthermore the interest being charged is very high, most car manufacturers now make more money from the loan payments of customers than they do from the cars themselves. In the words of Prof Tim Jackson, of the Centre for Undestanding Sustainable Propserity,  we are being actively encouraged to ‘spend money we don’t  have, on things we don’t need, to create impressions that don’t last, on people we don’t care about’. And as we do so we contribute to asset price booms that pit sections of society against each other as some benefit from rising house prices and others lose all hope of the basics of a good life.

This is a money system that is not run for the benefit of the country as a whole but that of its financial sector, who profit handsomely from this. The two global financial crashes of the 20th century both took place when governments left the financial system too much freedom and it looked after its own interests rather than that of the country.

Without destroying the valuable and value creating work of banks we need governments to reassert their own proper role, a role that includes:

  • insisting that credit from banks is tightly controlled and cheap
  • ensuring that between the government, their central bank and commercial banks, savers  are offered a full range of investment  opportunities at different levels of risk and return
  • making inflation only one of a number of targets for their Central bank, along with others that together enable a vibrant, supportive community of savers, borrowers, investors; employers, workers, and pensioners.

Ensuring businesses play their part

So another important government role is that of ensuring that business plays its proper role in enabling a flourishing economy. We can and should celebrate the ability of businesses and banks to achieve whatever targets they are set, but we must ensure they are set the right ones.  Currently in the Anglosphere their only target is looking after shareholders and they are doing this excellently. Sadly this is at the expense of everyone else. We need governments to require of businesses and banks that they play their proper role in a healthy money system.

There are all sorts of other things we could ask of them, for example:

  • reducing carbon emissions
  • increasing employment
  • ensuring rates of pay at or above a meaningful living wage
  •  increasing skills levels
  • increasing genuine productivity
  • reducing inequality.

And they would undoubtedly achieve these creatively and determinedly, they certainly have the skills and energy to do so.

Assessing a government’s financial performance

So the important questions to ask of politicians at election time are ‘What policies do you have that will help …..

  • individuals and families borrow money wisely?
  • keep inflation at a low (but not too low) level?
  • savers lend money wisely, invested in projects that will yield beneficial results for us all in the longer term?
  • banks and other businesses deliver a wide range of targets that lead to a healthy economy- in all senses of the word healthy?

So it is this that matters, not how much the government is borrowing but whether it is ensuring that all of us are using our money wisely for the future of ourselves, our children and our planet.

Further  reading:

Ann Pettifor: The production of money

Kate Raworth: Doughnut economics

Marianna Mazzucato and Michael Jacobs: Rethinking Capitalism

David Graeber Debt the first 5000 years

The Centre for Sustainable Growth

Nobody wants inflation – do they?

Inflation is always portrayed as something we must avoid: Central Banks are all tasked to keep inflation low – but why?

Clearly episodes of hyperinflation such as in Germany in the 1930s or Zimbabwe in the 1990s render the whole financial and trading system of a county unviable and lead to mass disruption, unrest and suffering. But hyperinflation is not at all the same as inflation, it has its own set of causes and consequences, mostly to do with a complete loss of trust in the government and the banking system.

Let’s look at what inflation is and what it does. In inflationary times people who have borrowed money find that their debt becomes much easier to pay off. So inflation isn’t bad for them, indeed it is positively useful. People on fixed incomes see their money buying less than they could before, and people who have lent money also see their returns decreasing in value. To them inflation feels like robbery. There are also very many people who aren’t in any of these situations – does it matter to them? Well actually research appears to show that some levels of inflation are good for an economy and the majority of people who make it up – and if we think about it we can see why.

Inflation happens when there is too much money chasing too few goods, services and investments. How much money there is in the system is the result of decisions being made by government and by banks about how much money to lend to people who need to set up businesses, and also to buy and renovate houses, and purchase goods that feed back into company profits and hence further investment. If governments and banks are too cautious the economy does not deliver the level of job opportunities, goods and services that we need. In that case, a decelerator cycle kicks in and fewer people invest in projects that yield jobs and returns, and companies start to lay off staff until there is an upswing. More and more people earn less or are out of work, buying less, so still more fall into that category and a downward spiral ensues.

So, rather than risk this, it is better for governments and banks to be slightly overoptimistic than too cautious, and as it is impossible for them to judge this entirely accurately, it is better to err on the side of too much lending than too little – resulting in some inflation. Governments can then find other ways to support those people who suffer from that.

It’s important to remember too that inflation can be measured in different ways.  While all Central Banks have had targets (and achieved them) for keeping inflation low, the prices of certain asset classes have not been included in the inflation statistics that they are measured against. House prices, for example, are not included in UK inflation stats (except in a funny proxy way that understates them massively), enabling inflation to be seen as low while mortgages and house prices have soared. So the inflation rate quoted by governments and their central banks isn’t one that is experienced by real people.

And while we keep an eye on what is happening to prices we should also take an interest in whether Companies are indeed investing money in projects that will yield long term benefits (employment, productivity, and products that improve lives). In recent years companies have been hoarding their cash and failing to do this, so the large amount of credit given to consumers has led to high levels of consumer debt and little of the economic growth that will allow this to be repaid.

Thus alongside an inflation target we need to task a Central Bank with ensuring that credit is offered only to projects that yield genuine (and not inflation based) returns, and that companies are actively encouraged to invest productively for the future.

And when we make an argument for low inflation we need to ensure that what we are measuring is what really matters to us (the real costs of all aspects of life, including housing), and we need to think about who suffers if inflation is too low as well as those who suffer if inflation is too high. When we decide to aim for a particular rate (or band) of inflation we need to think about how to meet the needs of those people who are disadvantaged by that level of inflation – because there will always be some people who benefit and others who suffer as a result of any inflation rate – and find other ways of compensating them.

So we need to topple inflation off its placing as the single measure of success for a central bank and ensure that these other factors vital to an economy and to society are included.

Further reading

Ann Pettifor: The Production of Money

Ha Joon Chang :23 things they don’t tell you about capitalism

The role of the State in decarbonizing the economy

Until now much of the discussion about decarbonizing society has focused on market solutions, primarily on carbon taxes, and on government subsidies for the consumers and providers of particular technologies. As a result of doing so the UK government tells a good story about decarbonizing our economy.

However this story omits the fact that most of the manufactured goods we buy are produced overseas, and that if we included in our own carbon usage figures the carbon used to make the products we import, then our place in the carbon usage rankings sinks from near the top to near the bottom.

What alternative/ additional roles are there for a government to play?

There is now an awareness of the need for action at a scale and pace previously understated. It will require significant innovation in technology. Who is going to undertake this? And who is going to pay for it? Can this be left to the market alone? What kind of roles can a government usefully play? How will this be afforded?

According to Murphy, Pettifor and Blyth any government with a sovereign currency does not have to rely on tax income for its spending. It can borrow and/or print the money it needs for a sound investment. Furthermore (Raworth and Pettifor) only governments can make investments of this sort, that require ‘patient money’. Companies do not have a long enough time horizon (Discounted cash flows mean anything more than a 20 year time horizon cannot be contemplated) and cannot take on the level of risk that a government can-because a government shares the risk over the whole tax payer base and over decades/ generations.

Many people (and almost all the media) do not believe this, so an important aspect of the government’s role will be convincing an electorate that this is legitimate. It will be easy for those whose interests lie in the current system to discredit this argument. So the government must be prepared with a massive campaign and deep pockets to counter this.

Even this kind of investment cannot be effective if our economy is an inherently unproductive one in which consumers’ money is wasted rather than used productively. This requires that credit is tightly regulated so that banks lend only on investments taking us towards a better future (especially but not only a carbon free one) and that they lend cheaply for these. This is the opposite of what is happening now, where banks are lending at rates that are very profitable for the banks, for day to day and profligate spending(think fast fashion e.g.). This move from expensive spending to cheap investing will again need an effective government promotional initiative.

Thus the government has a role in identifying and coordinating essential initiatives, and in identifying people and organisations able and willing to undertake these. They will not need to fund all this themselves because there are many people willing to invest their savings in projects of this kind: long term, steady returns. So another role of the government is to remind people that saving and borrowing are equally essential to society and that neither is more virtuous than the other.

As a means of supporting the switch from massive consumer spending based on readily available (profitable) bank loans, to prudent investment in decarbonizing technologies on the scale needed, the government may need to break up the banks. Banks will need to be a size at which they are no longer ‘too big to fail’, and regulated tightly enough to encourage only prudent lending (for investment not spending).

In the course of this, the relationship between industry, labour and finance may change for the better, and the government might encourage this: a greater alliance between industry and labour may emerge as that between industry and finance becomes more regulated.

Technological innovation of the kind needed will feed on other innovations and will not proceed in a linear pathway but as part of a complex and sometimes chaotic system. This will look to outside observers like a mess. There will be all sorts of examples of ‘spurious retrospective coherence’ as those involved ‘muddle through elegantly’ so the government must be able to tell a good story to an uncomprehending and hostile press. Part of their role will therefore be to inform and educate the media about the complexity of the task and the need for this kind of outcome.

Where will the people come from to undertake all this new research and development work? There are 200 million people unemployed and available for work around the world today, so governments around the world need to identify roles needed, train people, set standards etc. The kinds of new work that will be needed include: reducing the use of fossil fuels, supporting an ageing population, reskilling the workforce, repairing decaying infrastructure, sponsoring developments for Raworth’s ‘butterfly’ and in sharing good practice.

To assure that knowledge is shared as it needs to be governments need to ensure a healthy patent system, rooted in what is good for society and not only Corporations. But this needs to go further: as much tech development as possible needs to be Open Source, with as many components being standardised parts.

So there is a large role for the government in leading and supporting these changes, and an even greater one in educating the public about the need to do so.

Further reading

Kate Raworth: Doughnut Economics

Richard Murphy: The Joy of Tax

Ann Pettifor: The Production of Money

David Graeber: Debt the First 5000 Years

Mark Blyth: Austerity, the History of a Dangerous Idea

 Peter Senge: The Fifth Discipline

James Gleick: Chaos, Making a New Science

We’re still influenced by decisions made in the 17th century- isn’t it time we weren’t?

The Industrial Revolution started in Britain. Not because the British were uniquely clever or entrepreneurial but because the circumstances needed for such a revolution happened to coalesce here at that time. One of those circumstances was the newly formed Bank of England.

Thus, when the early industrialists wanted to set up new enterprises, they could invest at a relatively small scale, using their own assets and money they borrowed from the Bank. The British attitude towards borrowing is still rooted in this experience: if a business idea is good enough you can find the money to fund it. Debt is an inevitable and fruitful part of a thriving liberal economy.

By the time Germany entered the Industrial Revolution in the following century the scale of manufacturing enterprises had grown. Aspiring businessmen needed to set up a whole factory rather than buy a few Spinning Jennies. It was no longer possible for individuals to fund new developments themselves, borrowing relatively small sums as their British predecessors had done. No, German investors needed to save considerable amounts of money first, before they could take the much bigger risk of building a factory.

Today, too, Germans see saving as a virtue and debt as a (sometimes necessary but only as a last resort) vice. This attitude is at the root of what is called Ordoliberalism, always different in this important respect from English Liberalism, and significantly distinct from the current Anglosphere Neoliberalism. To a German banker people who borrow to purchase frivolities (such as new cars or washing machines) and fail to be able to repay those loans, are not unfortunate victims of a predatory banking system but engaging in something inherently more blameworthy.

So to Greece.

Before the introduction of the Euro, residents of ‘periphery’ countries within the EU had to pay higher rates of interest to borrow money from a bank than residents in ‘core’ countries, reflecting the higher risk of default or devaluation perceived by bank lenders. With the arrival of the Euro, backed by the ECB (European Central Bank), major banks started to price the interest rates on loans within all Eurozone member-states at the same level, and felt safe to lend as much as they (very profitably) could.

Lacking a history of borrowing, populations in the periphery countries, traditionally conservative about mortgaging existing assets, were seduced into buying high quality German manufactured goods they had never been able to afford. Sadly Western banks, losing sight of the safeguards needed for them to fulfill their legitimate lending role, focused instead on their own profits and lent to more and more people who would be unable to repay those loans in the event of a downturn.  

So when the GFC (Great Financial Crash) pulled the rug from under the global mountain of debt, the banks that had made those loans suddenly had to label them as safe or unsafe. It became clear just how risky the whole system had become, banks stopped lending, foreclosed on existing loans, and whole economies descended into a downward spiral.

So people in Greece found themselves unable to service the loans they had taken out while their economy was booming, and the Greek government  suddenly needed a temporary $50billion bail out, a large sum but, given the size of the Eurozone, a sum certainly manageable for the ECB. It would have reassured markets and would have prevented them looking more nervously at other Periphery economies (Spain, Portugal and Italy). A mere $50bm spread across the Eurozone countries, to prevent years of downturn and austerity across Europe. Why didn’t it happen?

Because of the ordoliberal instincts built into the ECB by its biggest backer: Germany. Why should a good, hard-working German saver bail out profligate lazy Greek borrowers. Never mind that the people working the shortest working hours in Europe are actually the Germans, and the longest the Greeks.

Would $50bn really have stopped the collapse of the PIGS countries economies? Nothing fundamental had changed in those countries from the day before the GFC to the day after, so there was no underlying reason for their economies to crash in the way they did:

Spain was especially fiscally well governed, with a much lower government debt ratio than Germany’s. It suffered from a private sector real estate boom (again based on over easy bank lending) and then a bust caused by the ongoing Europe wide economic crisis that resulted from the ECB decision to punish Greece.

Portugal had been suffering from globalisation, with the transfer of its traditional shoemaking trade to Vietnam, but was in the middle of restructuring, so needed only time and continued sources of credit.

Italy had the same demographic problem it had had for decades (very low birth rates and increasing longevity) which it had traditionally dealt with  by devaluation of the lire and now no longer could. But this hadn’t worried markets before, they only because jittery because of the GFC.

Thus early swift ECB support for Greece would have reassured markets, allowed banks and their creditors to behave sensibly, and industries and economies to waver and then steadily recover. Instead? Mass unemployment, alienation, hostility to migrants, – all the preconditions for further catastrophe.

Jonathan Haidt tells us that we make decisions based not on logical argument, but on a more innate sense of right and wrong – which we only then justify with rational argument. So it was an innate sense of Greeks being wrong and Germans right that led to this situation – where did this come from? From an implicit and unexplored belief in the virtues that underpinned Ordoliberalism: saving is good, spending must come second not first.

But the German economy is based on people in other countries spending – as German citizens not only have all the consumer goods they need but are inherent (ordoliberally) savers. So financial systems need to offer ways of supporting borrowers as well as lenders.

Thus for the Euro to succeed and the Eurozone to flourish it needs to move away from its ordoliberal roots and introduce means of dealing fairly with financial downturns. It can do this by:

  • Insisting on strict rules for bank lending
  • Being a lender of last resort for currencies that are having temporary difficulties on the world markets
  • Offering an arrangement whereby its members can declare bankruptcy.

For this to happen the ECB must be led by someone not locked into ordoliberal instincts, who recognises that different economies need different policies at different stages in their development and that the Eurozone as a whole needs spenders as well as savers. And even though we are not members of the Euro, and no longer members of the EU, as our economy will still affected by the European one, we could usefully take an interest in who that is and what their predispositions are.  

Further reading

Roy Porter: The English Enlightenment

Mark Blyth: Austerity – History of a Dangerous Idea

Jonathan Haidt: TheRighteous Mind

Do we believe in magic money trees now?

‘There isn’t a magic money tree’ scoffed Theresa May at the 2017 election. ‘Labour spending plans will dangerously increase government debt’.

‘Its investing money in the right way that matters’ responded Labour supporters, ‘how wisely we spend is more important than how much’.

They argued that productive investment is what the country needs, on a scale that only governments can offer. Investing in major infrastructure projects (homes, railways, and green energy for example) leads to more and more employment as people in real jobs on fair wages spend money that is earned (not borrowed) on goods and services produced by more and more people who would otherwise be underpaid or underemployed.

Tory-led governments in power since 2010 have argued differently:

‘governments are hopeless at spending money wisely, entrepreneurs and business people competing in a market, rewarded for their success, bring a different energy, creativity and expertise. Government crowds out private sector investment because the price of money becomes unaffordably high. What’s more, the debt mountain incurred by such government borrowing is a burden that will continue to be bore by our children’s children. This is irresponsible. That is why we need to reduce government spending, we can only choose between  cutting services and raising taxes’.

(Although it is worth noting that the Boris Johnson government had abandoned this without signaling their change in underpinning beliefs even before the Corona Virus crisis).

Who to believe?

Exactly similar arguments have been taking place since the 1600s and the beginnings of the banking system. They have their root in very different beliefs about what money is, how it works, and what part banks and bankers play in this. If we want to know who to believe when we’re choosing who to vote for we need to understand the history of those arguments.

The founders of the Bank of England (in 1694) were responding to the frustration  and envy of English merchants as they watched their Dutch counterparts able to borrow money cheaply (at a much lower interest rate than the rate charged by English money lenders) and invest it in productive activities. They saw Dutch traders invest in the ships and arms needed to colonize countries around the globe, increasing the wealth and prestige of their country as well as themselves. English traders not only wished to do the same, but also invest in the emerging possibilities of the Industrial Revolution.

In other words: the Bank of England was set up to lend money cheaply for productive investment, thus increasing the overall wealth  of the country (its capacity to produce goods and services for the benefit of all) as well as of the merchants themselves. Its establishment was as important to the Industrial Revolution as the invention of steam locomotion.

Others have seen banking differently. David Ricardo, 120 years later, (himself a financier as well as an economic thinker), argued that interest rates were not set by banks, but were the result of a competitive market in money. Banks were essential intermediaries between the different market players, borrowers and lenders, but they implemented interest rates set by that market, not by themselves.

In these two arguments we see two very different beliefs about what money is. Is it a finite resource, as Ricardo’s argument suggests, for which there is therefore a market? If so, and the only other way for one person to have more money is for another to have less, then the role of the banks is to be the intermediary between people who have money and those who have a project that needs money.

The expertise of the bank is in finding and putting suitable lenders together with borrowers who could make their money grow, and this justifies a significant bankers fee, in addition to the interest rate set by the market.

‘Ah’, others argue, ‘but bankers have never relied entirely on finding savers before making loans to borrowers. They have always issued credit based on an assessment of the overall risks of all the projects they were financing’. In other words they have created credit out of thin air if they have confidence in the scheme they are lending to. And if there is no ‘real’ money involved then there is no market price for it, the interest rate can be set by the bank at a level that enables the enterprise to succeed. Here the role of the banker is in assessing the risk, reward and benefits of a project, and setting an interest rate that reflects these. Quantitative Easing was an example of this, and so too is the loan you take out for a mortgage. (When you do this your bank ‘creates’  money by entering figures into two columns in your account, one with the amount loaned, the other with the amount due to be paid back. No new money is printed by the Mint to fund this).

So, is money a tangible, finite commodity for which there is a market? Or is it something very different, not finite at all, an idea, something that exists largely in our heads, on paper in ledgers, in cyberspace? Or, in other words, are amounts of money the results of people doing business, or are they the necessary means by which business can be done.

If it is the former (the result of business being done) then there are valid arguments for markets to be allowed to run as efficiently as possible, focusing only on trade being as smooth and easy as it can be. Here, any resulting undesirable effects (poverty, inequality, ill health, differences in life expectancy, …) should be met through charitable or government means. This view is often called the ‘household’ view of economics, espoused by Margaret Thatcher, who insisted that the country could not spend more money than it had.

If it is the latter (not the result of  business being done but the means by which this happens), the State has a vital role to play in ensuring that the money system is used for the benefit of society as a whole and not only in the interests of some parts of it. Here society as a whole, through active involvement of its government, finds ways of enhancing the economy by ensuring investments yield not only profits for the owners but other socially useful things like fulfilling, well paid work for employees, training for apprentices so that the skill base of the country is maintained and enhanced etc. In this view a sovereign government can valuably increase the money it spends by borrowing it or by printing more, as long as it invests that money for the long term and does not use it for short term spending.

And these are the different beliefs behind ‘no magic money tree’ and ‘its where you invest it that matters’. For us to support one of those arguments or the other we really do need to be clear about what we believe about the very nature of money.

Economists and bankers have been divided on this for centuries (and are perhaps not the best people to make this judgement as their own interests are so affected by the outcome). However there is growing agreement that banks do indeed create money out of thin air every day. They are doing so right now to provide the wherewithal to fight the Corona Virus emergency.

Here is the Canadian Parliament describing how this is done: Here is Stephanie Kelton formerly Economic Advisor to President Obama doign the same:

This is still contested by many financiers and economists although it is becoming a more mainstream view. Perhaps though we can make up our own minds. To do this we can think about the periods of time when populations have been well served by the monetary system, when work was plentiful, work conditions attractive, incomes offered a decent standard of living, societies were equitable etc, and those (as now) when they have not.

Sadly many of our elected representatives (and the journalists covering them) don’t understand this underlying difference of view and lazily slander their opponents as wicked or incompetent rather than as seeing the role of money in a different way. We urgently need to become better informed oursleves

Read more about this here:

Ann Pettifor: The Production of Money

Richard Murphy: The Joy of Tax

Marianna Mazzucato and Michael Jacobs: Rethinking Capitalism

Mark Blyth: Austerity – History of a dangerous idea.