How will we pay for it?

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."