There are lots of good ideas for how we can
begin to do things to help reduce our national carbon footprint and to do so
systemically and justly. However, many of us when we talk about these things
with others in our families or churches face a response along the lines of
"That's all very well, but how shall we pay for it?"
When we hear that we know only too well where it's
coming from. -Decades of popular media and influential politicians talking as
if the national economy were a household budget. Margaret Thatcher's dismissal
of some political-economic options as leading to "running out of other
people's money" also calls to mind the idea that in order to pay for some
things we have to take money from "hardworking people".
It has proved to be an effective way to dismiss political
opponents’ priorities as unaffordable -"there is no alternative" to
monetarist approaches. Of course, this has been a tad hypocritical too: somehow
money has been found for all sorts of things that these politicians have deemed
important: military actions, protecting banks from their folly, building roads,
commissioning nuclear power plants, subsidising fossil fuel operations,
supporting pandemic measures, even MPs' pay and expenses.
But leaving aside those outrageous double-thinks,
what about the main question: surely to pay for these things we have to raise
the money somehow? And if we 'borrow' it, don't we have to 'pay down the debt'?
To begin to answer that, let's switch the analogy
and in doing so, question the implicit assumptions of the question. This is
casting doubt on whether the household budget analogy (sometimes called
"handbag economics") is at all helpful in thinking about an economy
at a national level. But there isn't always an easy analogy to replace the
image of the handbag holding the housekeeping money.
I’m going to assume that you are familiar with a
certain popular board game about property ownership. You know the one I mean: it
has as its logo, cartoon of an early 20th century business tycoon wearing a top
hat and morning dress and the name of the game refers to a state of having
pretty much bought up everything. Anyhow, enough of this coy characterising:
I'm suggesting here that in respect of the question 'how shall we pay for it?'
this game actually provides us with a more helpful analogy than what Mrs
Thatcher imagined that housewives kept in their handbags.^*
I’ll start by asking a question that many players
of the game may not have ever had to face. I discovered it in my teens while
playing it with my siblings. We happened into a situation where the banker had
no currency to pay players the requisite £200 of game money for passing the
'Go' square. We wondered whether this meant the game was over. We consulted the
rules. The rules say: "The Bank "never goes broke." If
the Bank runs out of money, the Banker may issue as much as needed by writing
on any ordinary paper." And that's what we did. And the game went on, no
doubt grinding to some inexorable beggar-thy-neighbour impoverishment so that
one of us could crow in momentary triumph -I now cannot recall anything more of
that game than what we discovered about the permanent solvency of the Bank. Had
we known it then, we might have called it our magic money tree.
At the time I didn't really clock the significance
of it -that it can help us to understand a few important things about
whole-nation economics ("macro-economics"). It helps us to grasp why
'how are we going to pay for it?' is a misconceived question. Of course, if you
want a quick rejoinder then simply say "The same sort of way we bailed out
the banks and the pandemic hit economy". Hopefully this game analogy will
help you to offer a follow-up explainer to that quick rejoinder. And, In case
there's a worry that making an analogy with a game is not very authoritative, maybe
it’s worth remembering that the analogy of a household budget held in a handbag
is more sketchy. At least the game is a kind of working model of an economy
whereas the handbag analogy is mostly cheque stubs.
So, how might the game analogy be helpful? Well,
for one thing, it helps us to grasp an insight captured in both Keynsian and
Modern Monetary Theory. The analogy is about the relationship between money on
the one hand and on the other the goods and services that we might want to
exchange and mobilise in the economy.
Imagine, for a moment, all those goods and services.
lined up in front of you. Now imagine a stack of money laid out in front of
them. That stack of money stands for all of those goods and services standing
behind the money. Those goods and services can be exchanged for the money. The
money represents -stands for- the goods and services in the economy. You might
even say the money is “backed” by those goods and services. Money is a way to
facilitate the exchange of those goods and services. If we put it in terms of
the game, the currency stands for the properties, houses, hotels and various
less-material occurrences in the game like passing go, winning a prize, getting
out of jail and so on. We could think of the game as a pocket economy and in a
real sense it is. This is why we can use it as a model for thinking about some
aspects of a much bigger national economy.
The next step in exploring the analogy is to notice
that some goods and services are not necessarily in active use in the economy.
They are sitting there, potentially in use but not actually being used
precisely at this moment. For example, in a real economy, if you have people
who could work for money but aren't doing so currently, they'd be potentially
in 'economic use' but not actually. They are a kind of 'reserve' of economic
potential. In the game, this would be any stock of un-bought property squares,
unplaced houses and hotels and fines or prizes etc that are still in the stack
of game cards.
The next step is to consider how to bring things
into the game from the reserve. This is, of course, what the game is about at
least i the initial stages -bringing properties etc into active participation
by being bought and rented. And to that end, the set-up of the game primes the
players with a stock of currency before the game begins (and tops that up each
time a player passes the go square). This currency represents much of the
potential 'economic activity' of the game: it will allow players to buy
properties, pay rents, settle fines etc -all of the economic activities of the
game. The interesting thing about this is that it helps us to grasp one of the
insights of modern monetary theory: that money creates or unlocks economic
activity. If you didn't start the game with money, you wouldn't really start
the game at all or it’d take a very long time to get into the fulness of the
game.
If the Bank of Game runs out of money, it's
generally because there is a lot of exchange in terms of rents passing between
players and at least some players are sitting on big wodges of currency.
Nevertheless the rules give the banker the obligation to keep paying out £200
for passing go and to give out the occasional 'prize' from the turn of a chance
card. This obligation can be met in the event of being 'out of currency' by
simply making more. This enables the game to continue at the more intense level
of 'economic activity' that it has currently reached. That's the crucial thing
to notice. The increased money supply that the banker creates into the game
enables it all to continue. This currency is made ‘by fiat’ (to nod towards
another technical term) but it represents economic activity that is about to
take place, and in fact enables it to take place.
So, “how will the bank pay for it?” -We can see now
that this is a non-question, in reality. If the thing needs doing (and the
rules make it an obligation), the bank is not really “paying” for anything, it
is merely enabling things to carry on or to develop further. The money isn't ‘payment’
when the bank creates it, it is enabling activity.
In some ways it could be thought of as an
investment, but not one that needs ‘paying back’ because the pay-back is that
the game continues and everyone can continue to play their part. As it happens,
the bank will at some point probably get currency back in the coffers as people
pay fines or buy housing or hotels.
The bank's aim in the game is not to run a balanced
budget (what could that possibly mean?) but to enable the game to continue. I
suggest that this is a helpful way of thinking about a government with its own
central bank -like ours in the UK. Economic activity requires currency. There
has to be enough currency for the economy to do what it is supposed to do. If
there isn’t enough, then more can be created to correspond to the desired level
of economic activity. The trick is to make sure that the newly-created currency
is inserted into the right places to be effective.
How, then, will we pay for it? In
fact, we can now see that we already have ‘it’ in reserve -we wouldn't
pay for what is already in our possession (remember we are talking in
collective, national terms). The actual question is not about paying for ‘it’
but about how to move ‘it’ from being in reserve to being in use. What was
being called "paying for it" is in reality noting the value of the
things that you want to bring from the reserve (work by humans, physical stuff
like raw and processed materials to be worked with) and then accounting for
that value by making the currency to represent it. At that point, you can pass
on that money to the people who are able to mobilise the resources and the work
to bring something into the 'game' (which is our economy). It's a matter of
timing rather than availability: the money you create doesn't create value, it
merely represents it, accounts for it and enables it to be mobilised in
economic terms.
The fact that we use currency to begin to do that
is perhaps the thing that misleads us. It misleads by surreptitiously inviting
us to make an analogy with a cash-stuffed handbag. This is an error of
mistaking levels. That is to say, it is like trying to explain the movement of
sub-atomic particles by talking as if they have volition and intentions or
talking about psychological volition as if only the description of sub-atomic
particles is of any value.
So, "How do we pay for it?" -We don't; we
already own whatever "it" is. We just need to use the social
mechanism called “currency” or “money” to bring the things we have at our
disposal into use in appropriate ways. The money we 'create' to do that is really
a cunning accounting trick to help co-ordinate human efforts.
Modern monetary theory tells us that when some
politicians or media people say "tax and spend", they are misleading
us (useful video by Stephanie Kelton here). In fact, the order in macro-economic logic is exactly the reverse:
"spend and tax": this is what we should be saying to help us get
things straighter in our heads. We create the currency and place it at the
disposal of various people (spend it into use) so that they can mobilise
resources to get things done. We can then tax back the surpluses so that they
don’t accumulate in, say, offshore financial hoards (think: Smaug on a pile of gold).
"How shall we pay for it?" is not really
a question about whether we have got the money to do so, it's more
fundamentally a question about how we marshal our resources and deploy the way
currency flows in the economy to make sure that resources end up roughly where
they will do the most good.
To rework the rules of that game from earlier,
"The economy never goes broke. If an economy runs out of money, the
government via a Central Bank may issue as much as needed by coining, printing
or crediting bank accounts."
There is more to be said not least about how the
game analogy works for other macro-economic reflection too. It helps us to
notice things about how money works which we may find helpful. Subsequent explorations of further
questions and analogies will be linked back to this post.
We will need to think
also about things like taxation, savings, inflation and circulation of money as
well as notice what this suggests about wealth and distribution of resources
and money. It will have bearing too on matters to do with being in an economy
which is itself one among other economies, international trade and resources
and so forth.
In the meantime, you could consolidate your
learning and enhance your reflection by gathering some friends or family and
getting them to agree to play the game but with modified rules… These ideas are
found in the post here.
Check it out:
https://twitter.com/andyverity/status/1366398494114799619?s=20
There is no such thing as taxpayers' money -by Richard Murphy -also worth checking out his free e-book Money for Nothing and my Tweets for Free.
This article on basic income and sovereign money makes similar points and explains the concepts in relation to a basic income.
^* Update: I finally (10/1/2022) got down to reading Stephanie Skelton's The Deficit Myth, I discover in chapter 1 that she refers also to the Monopoly game principle that the banker never goes broke and the consequent rule that they simply issue promissory notes. At that point she doesn't explor the ramifications in the way I do here. However, she did precede the mention of the game with a helpful analogy drawn from a story told by Warren Mosler about failing to get his own household chores currency to work until he made it worth something to his children by taxing it in exchange for some household 'services' like TV privileges.
PS (February 2023) This article passing on a winning strategy at monopoly, ends with these words: "It is difficult to read this without thinking about income inequality in the real world."
