October 7, 2020
In this post I want to explore a common way that people talk about money in political discussions and what I think is wrong with it. But first, a story.
Imagine that you are an astronaut in the year 2792. While resting in your quarters at a base on one of Neptune’s moons, you receive an urgent transmission from central command. Scientists from Earth’s deep space exploration agency have picked up a signal from a distant planet – a signal they believe could only have been produced by intelligent life.
Yawning and rubbing your eyes, you ask what’s so special about this news. There have been countless discoveries of intelligent life on other planets since the Zarglovians of Greyon Alpha first made contact with Earth in late 2020. Was it really necessary to interrupt your nap just to inform you of a potential new intergalactic trading partner? Couldn’t this mission have waited a few hours?
But your handler explains that this one is different. Based on spectral radiation analysis, the scientists believe that this planet has a wealth of a natural resources like nothing we have ever seen. If their calculations are correct then the life forms living there must be enjoying an existence of virtually unlimited abundance. And without resource scarcity to hold them back, it is likely that they have developed technology beyond anything we could even imagine.
Now wide-eyed and sitting bolt upright, you struggle to contain your excitement as your mind blooms with vivid images of what this Utopia must be like. You can hardly believe your luck that you have been selected as the first human to visit it. Frantically, you thank your handler for the mission, end transmission and waste no time hopping aboard your space cruiser and blasting off in the direction of this heavenly world.
When you arrive, you are surprised to see that there are no shield barriers around the planet. You wonder whether they have some other, far more advanced, way of defending themselves. Perhaps to them, planetary shied barriers would seem laughably primitive. As you enter the atmosphere, your cruiser begins scanning the surface for signs of civilisation. But after several orbits it find nothing: not a single building, ship, road or any other kind of infrastructure. Perhaps they live underground, or maybe they have some kind of cloaking system to hide their cities from scanners like yours. You decide to land and have a look around.
As you approach the ground, you see what look like living beings moving about. As your cruiser touches down you realise that yes, these are the intelligent creatures you have been sent to find. But there are no grand buildings, no futuristic hover-highways and no majestic space ports. There are just rusty huts, full of holes and held up with precarious looking support beams. The inhabitants, huddled in and around the huts, are dressed in rags and are shivering from the icy wind. They appear to be severely malnourished.
Confused, you decide to approach the being standing outside the nearest hut and make contact. As you get closer, holding up your hands to show that you mean no harm, the being starts to speak. The universal interpretation software in your helmet decodes the language and converts it to your native Earthlish: “Please visitor, you must help us. We live in the most extreme poverty. We have barely any food and our decaying huts do not protect us from the elements”.
“What has happened here?”, you ask, your helmet translating your speech into the local dialect, “Has there been a war? Or are the beings who rule this planet refusing to share resources with you? Perhaps I could speak to them and negotiate a treaty“.
“No”, replies the being, “there are no others, ours is the only civilisation on the planet. And we have not had a major conflict for thousands of years”.
“Then I don’t understand. Why are you living in such poverty? The scientists on my planet predicted that your world would have an abundance of natural resources. Was their analysis wrong?”
“No, it is true, we have more natural resources than we could ever use.”
“What is it then, do you not have the means of producing enough food? I could bring seeds from Earth. We could genetically engineer them to suit your climatic conditions and nutritional requirements”
“No, that’s not a problem either. In fact, we have a great many varieties of seeds and spores that can grow into highly nutritious foods. And we have vast areas of fertile land on which to grow them”.
“Ah, well then is the problem that your species lacks the physical capacities needed to cultivate food, build machines and construct buildings? I’m sure my home planet could send some robots to help you with the labour. Or is it that you have not yet made the scientific discoveries needed to know how to carry out these tasks effectively? If that’s the case then I’m certain we could send some technological advisers.”
“Thank you for the offers, kind traveller, but no, we do not have those problems either. Our species is very well adapted to carry out the work needed. And we have an excellent understanding of the best ways to do it.”
“Well then I really don’t understand. If you have more natural resources than you could ever use, you know how to use them to produce all the things you could ever want or need, and you have the capacity to do the required work, then why is everyone in your entire civilisation suffering such poverty?”
“Well you see, stranger, we are cursed with a terrible problem, one that has plagued our people since the dawn of civilisation. Our planet has no money”.
The purpose of that absurd little story, apart from giving me an opportunity to indulge my secret desire to write science fiction, was to illustrate something important about money. You probably noticed that the ending of the story didn’t make any sense. Not having any money couldn’t actually be the reason for the alien civilisation to be starving and living in broken-down huts. This demonstrates an important point that I think is often missed in discussions about economics:
It never makes sense to say that a society does not have enough money.
This may seem like a bold claim, but I believe it is true and in the rest of this blog post I will try to explain why.
The first thing that is important to realise is that money is not a resource which a society needs to obtain from somewhere. We, as a society, do not need, for example, to go into the hills and dig up money.
This is a point that can be a little confusing because many people assume that the value of coins comes from the fact that they are made of metal. Paper money and digital money (the numbers in bank accounts) are then assumed to be somehow linked to deposits of metal coins that are stored in bank vaults somewhere. These common assumptions are in fact misunderstandings of the way that money works.
Firstly, the value of modern coins has nothing to do with to the value of the metal they are made of. They are just tokens with numbers written on them that state how much they are worth. For example, a one pound coin is worth one pound because it says ‘ONE POUND’ on it (and because the law says so), not because it is made out of £1’s worth of metal (it isn’t). In fact, the monetary value of coins (that is, the amount written on them) is generally much higher than the value of the metal they are made of. Otherwise, people would just melt down the coins and sell the metal, which is what happened in India when the value of a rupee fell so much that the metal in a one rupee coin was worth considerably more than one rupee.
Secondly, the value of bank notes and digital money is not tied to stores of coins (or gold bars) in bank vaults. If you have £100 in your bank account, it does not mean that your bank has a box with your name on it somewhere containing £100 in cash, ready for you to collect. Despite what they may (for historical reasons) have written on them, bank notes are not a promise from the Bank of England to pay you real money — they are real money. The same goes for digital money. In fact, 97% of the money currently held by UK households and businesses is digital money in bank accounts. In other words, the number of digital pounds is vastly more than the number of pounds in the form of coins and notes.
Money is really just numbers. Sometimes, the numbers are written on physical tokens (like bits of metal or paper) which we carry around in our purses. To pay someone, we simply hand over some tokens and the numbers now belong to them. Other times, the numbers are written down (or stored digitally) in a list, called a ledger, in centralised location (like the database of a bank). The ledger contains the names of all the people who have money and next to each name is the amount of money they have. When we want to pay someone, we have to ask the person in charge of the ledger (the bank) to adjust the numbers accordingly.
Using numbers as money is nothing new. Although there have been examples throughout history of valuable goods (like precious metals) and sometimes even services (like an hour’s work) being used as money, there have always been forms of money that were just numbers. And this includes both token and ledger systems. One of the oldest known examples of money consisted of centralised records of debts inscribed on stone tablets — in other words, ledgers.
The advantage of a token-based system of money is that when you want to pay someone you simply hand over the tokens (coins, notes) representing the appropriate amount. There is no need to involve a third party. Historically, this has made for quicker and easier payments (you don’t have to go to the banker and ask them to make the transfer). It also provides privacy: there is no need for anyone else to know what you are spending money on or who is paying you.
The advantage of a ledger is that it is generally more secure – you don’t have to worry about losing tokens down the back of your sofa, it is harder to rob you, and your money is much less likely to be accidentally destroyed.
With ledgers now being stored digitally, rather than on paper (or stone tablets), and with the ability to easily make digital payments using bank cards, direct debits and smartphone apps, ledger money (in the form of digital money in bank accounts) has increasingly become more attractive than token money — especially for large payments. This is what has led to the dominance of digital money over cash (a trend which has been furthered in the last year by concerns about cash being a source of infection).
So if money is not records of deposits of precious metals in bank vaults, then what it is? I think it makes most sense to think of money as a social system, which is used by people living in societies to facilitate certain economic activities.
These economic activities are generally things which could be done without money, but which are made much easier by using money. They include:
Although it is possible to use things that have existing value (like precious metals) as money, it is usually easier just to use numbers. People in the society are given numbers (either by handing them physical tokens or by writing a number next to their name in a ledger) and then use those numbers to carry out the kinds of economic activities described above.
Aside from the confusion caused by coins being made out of metal, another reason why it can be easy to fall into the trap of thinking that it is possible for a society to not have enough money is the fact that this is the way that we experience money in our own lives.
As individuals, it makes total sense to think of money as something that we need to get from somewhere. In order to obtain many of the things that we need and want, we have to pay for them using money. And since we don’t, as individuals, have the power to create money, it has to come from somewhere. Therefore, at the individual level, not having enough money can be a very real problem.
However, societies are not individuals. As explained above, money is a social system which consists of numbers assigned to people. An individual within that system may not have enough numbers assigned to them to meet their needs, but it is meaningless to say that the society does not have enough numbers.
As an analogy, suppose that a group of friends are playing a game where the winner of each round gets a point. It is totally possible for one or more of the participants to find themselves without any points, but it would be absurd to suggest that the group could run into a problem where the game cannot proceed due to a shortage of points to distribute.
If, having read this far, you are feeling somewhat sceptical, I suspect that that scepticism probably involves the concept of inflation.
Many of us at some point in our childhood had the thought, “Hold on. Why can’t they just print loads of money and give it to everyone? Then we’d all be rich!”. If we expressed this thought to an adult, it is likely that they chuckled and explained inflation to us.
The value of a currency (like pounds sterling) is not fixed. It can change over time depending on the amount of currency in circulation and the amount of goods and services available to buy with that currency. If the amount of the currency in circulation goes up but the total amount of stuff available to buy doesn’t change, then prices will go up, meaning that each unit of the money (each pound) is worth less.
If the Government just printed loads of new money and gave it to everyone, then everyone would have much more money to spend, meaning that the amount they would be willing to pay for things would be much higher. In other words, there would be more pounds chasing after the same amount of goods and services. The people selling goods and services would realise that buyers were now willing to pay more, so they would put their prices up. This increase in prices is called inflation, and it means that the amount of stuff you can get for a pound is less than it was before, cancelling out the effect of giving everyone the extra money.
So I am certainly not saying that we can solve all economic problems by simply creating more money. Rather, I am making the point that money is just a social system that facilitates certain economic activities, it is not those economic activities themselves. Therefore, if there is an insurmountable economic problem in a society, it must be something other than a lack of money.
In fact, the issue of inflation illustrates this point rather well. A more direct answer to the child’s question of, “Why can’t we just give everyone loads of money?” is to simply point out that it is not actually money that improves a person’s quality of life – it is the things that they can buy with that money (food, clothing, games consoles, etc.). Since the act of creating new money and giving it to people doesn’t produce any more actual stuff, it wouldn’t make sense for it to make them richer. You can’t produce more goods and services simply by adding more numbers to the system.
That being said, I do actually think that money creation can be used as part of the solution to certain economic problems. Newly created money can be distributed in ways that lead to the production of more goods and services than would have otherwise been produced (for example, by creating money and distributing it as loans or grants to carefully targeted businesses). If the amount of money in circulation and the amount of goods and services for sale both increase by the same proportion, then there will be no inflation. It is also worth noting that new money is, in fact, already being created every day, just not necessarily in ways that are carefully planned to be beneficial to society – so this is not as radical of a proposal as it may sound.
The reason why money creation can help in certain situations is because there are situations where the only thing preventing useful economic activity is someone not having enough money. For example, imagine an entrepreneur who has a great idea for a business that would produce a good that people would really benefit from and would want to buy. There is a factory sitting empty that is available to rent, there are unemployed workers looking for jobs, and the necessary raw materials are available to buy. However, the entrepreneur does not have the money needed to start the business.
In this situation, all of the material things that are needed are available. The only thing that is missing is money, which is just a social system that consists of assigning numbers to people. The people in charge of the money system (the State) could just create the required money in the entrepreneur’s bank account, and then the useful activity could proceed.
Of course, there are situations where there are genuine material problems preventing useful economic activity. For example, perhaps not enough of the required raw materials are available, or there is not enough space available to carry out the production, or there aren’t enough workers available to do the work. Money, being just a system of numbers, cannot solve material problems like these. Creating more money cannot somehow magic into existence more raw materials or more land.
In short, since money is made up, creating more money can solve the made up problem of a lack of money, but it can’t solve real, material problems like a lack of physical resources or labour. Clearly, then, it is important to find out which of these two types of problem we have in any particular situation. But it is impossible to do that when we are arguing about whether or not there is enough money.
When a politician says that there ‘isn’t enough money’ to enact a particular policy or to resolve a particular issue, this should be seen as an absurd and meaningless statement.
An appropriate response to such a statement would be to ask what the actual problem is. There are all kinds of genuine problems that could make it impossible for a country to achieve a particular goal: a lack of resources, a lack of labour, a lack of technological know-how, being under attack by a foreign power, and so on. If such a problem exists, then the politician should simply describe that actual problem, rather than talking about the make-believe problem of a lack of money.
If there is no such underlying problem that the politician can point to, then we should assume that either they don’t really understand how money works or they were just using the ‘not enough money’ excuse to hide the fact that they don’t actually want to do the thing in question.
Even if there is some genuine, material reason why the goal cannot be achieved, that should not be the end of the conversation. A logical next step would be to ask whether there is anything that can be done about this material problem. For example, if there is a labour shortage, could this be addressed by encouraging more immigration and/or increasing the availability and accessibility of training?
Unfortunately, the conversation rarely gets beyond a debate about whether or not there is enough money. Usually it is right-wing or centrist politicians who claim that there is not enough. Rather than pointing out the absurdity of such a claim given that money is just social system of made up numbers, the typical response of the Left is to argue that there is, in fact, enough money (the Government just needs to gather it through increased taxation or borrowing).
The problem with this response is not that the policies it suggests are bad ones. In fact, I think increased taxation and borrowing can, when used well, be good policies. Rather, the problem with the Left’s response is that it fails to question, and therefore implicitly supports, the idea that it is possible for a society to not have enough money.
An example of this happened in the 2019 UK general election. The Labour Party, led by Jeremy Corbyn, were proposing a vast array of societal improvements, such as ending rough sleeping, providing free broadband to all, increasing spending on public services, and building 100,000 new council homes per year. The response of the Conservative and Liberal Democrat parties was to ask sarcastically whether Corbyn had found a magic money tree. Rather than pointing out that this argument is based on a fundamental misunderstanding of what money is, Corbyn quipped back, “The magic money tree is doing really well! It’s in the Cayman Islands, it’s in the British Virgin Islands, it’s in the Isle of Man, it’s in the Channel Islands, and it’s absolutely fine”.
Perhaps, given that election day was just around the corner, Corbyn’s response was the right tactical choice. In the days running up to an election, it might be too late to start trying to explain to voters concerned about ‘how we’re going to pay for all this’ that money is in fact just a social system that society can use to its will, rather than a resource that we must obtain from somewhere. In that situation, maybe it was a better idea to remind voters of all the money the rich are keeping in various tax havens and of Labour’s plans to get it off of them.
But the problem is that the Left hardly ever talk about what money is. Instead, we get stuck having an ultimately meaningless argument about whether or not there is enough money. This is a difficult argument to win because a lot of people listening will feel that, as non-economists, they aren’t really equipped to judge whether or not there is enough money. This makes it very hard for them to know which side to believe: the leftists who are insisting that there is enough money or the centrists and right-wingers who are insisting that there isn’t.
If, instead, the Left directed more effort towards spreading a better understanding of what money is, then we could stop having that absurd argument altogether. In its place would be arguments about the actual things that are needed to make economic advances: labour, technology, land and other natural resources, and so on. This would take the conversation out the world of the abstract and into territory that more people would feel confident having an opinion on. It would be easier to show that we often do actually have the things we need, we just aren’t directing them towards improving most people’s lives – and even when there genuine shortages, they are rarely permanent, unavoidable ones, but are instead usually the consequences of bad policies that can be changed.
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