Introduction to the Alternative Narrative
The orthodox economic theories, which still fill economics textbooks as they did when I was studying 50 years ago leave much to be desired. They are based on the idea of ‘homo economicus’, who has perfect knowledge of the market and is solely motivated by maximising his satisfaction from consumption of goods and services. However they do not reflect the reality and complexity of our lives. These theories are founded on mathematical models which assume deterministic relationships between many variables. This erroneously assumes that there can be an equilibrium in the complex, dynamic system which is our economic world. Chaos theory proves this to be far from the truth.
These old-school theories were formed in a world before social media and its influences on behaviour. They were developed in a world before computers which have enabled the establishment of more and more complex financial and commodities trading instruments and which can carry out transactions in vast quantities at lightning speed. They were developed in a world before ‘fiat currencies‘ stopped being convertible into gold or silver. They ignore the effect that all these developments have had on the distribution of power and rewards within markets.
As a result, the value of treating economic analysis independently from the societal and political spheres in which it takes place has become questionable. Recognition of this has led to the movement for the rethinking of the economics curriculum, which has been spearheaded by students around the world as the International Student Initiative for Pluralist Economics (ISIPE).
It has led to heterodox approaches to the subject based on an empirical approach and a variety of perspectives. Hence the existence of ‘Alternative Narratives’ which receive hardly any exposure in politics nor the media, presumably because they challenge the existing distribution of power and wealth.
In this first part of a three part series, I explain how an ‘Alternative Narrative’ explodes the myth of “Taxpayers’ Money”.
How much ‘money’ do you have with which to express your wants and needs? Just think for a minute – what is that money? The cash in your pocket is just pieces of paper and a few chunks of metal which have no intrinsic value. The money in your bank or pension is just a figure on a spreadsheet and also has no value in itself. It is only of any use to you when you spend it.
Why then are other people prepared to accept it as payment? Why are all transactions in this country carried out in pounds sterling? Because there is one payment we are all obliged by law to make and we need pounds sterling to fulfil it – our taxes.
Taxes have a bad name. The implication from politicians and the media is that taxation involves the government taking off us that which is ours in order to spend it themselves. This narrative leads to claims that the government can run out of money and statements like Mrs Thatcher’s, “There is no such thing as public money. There is only taxpayers’ money”, which conjures up a picture on the left where tax goes into the piggy-bank to allow the government to spend.
But go back a step. Where has the taxpayers’ money come from? How did it enter the economy in the first place? Only the government, with the authority of Parliament, can create currency through their spending, a ‘fiat currency’. The true picture is more like the one on the right.
When public servants are paid, seniors receive their pension or firms are paid for providing infrastructure the money is created in their accounts through a computer keystroke and the circulation of that money then generates economic activity in the private sector as in the diagram below. “There is no such thing as taxpayers’ money. There is only public money” is a more accurate narrative than Thatcher’s mantra.
So why the need for taxation if the government can always create the money it wishes to spend? Looking at the diagram above, the limiting factor on economic activity is not finance but the availability of resources to produce the goods and services. These resources include qualified professionals, skilled craftsmen, seasonal fruit pickers, raw materials and transport systems. If the government just kept spending into the economy, eventually there would not be enough resources to meet the needs and the price level will rise. Some of the spending power which has been created needs to be removed and this safety-valve job is done through taxation.
So government spending creates currency and taxation maintains the currency’s value and releases resources for private sector activity. Rather than resenting taxation maybe we should accept it as a duty we all have in order to maintain a functioning mixed economy – and stop talking about taxpayer’s’ money.
A further consequence of this alternative narrative of the way the economy actually works is that UK government spending is not limited by the availability of money but by the availability of resources and their distribution between the private and public sectors. Given that most private sector activity is focused on using resources for short term gain, does it not make sense to value government spending and the subsequent necessary tax back if it helps to sustain those resources? What that means is supporting the best healthcare, education opportunities and living conditions for citizens – our human resource: monitoring, regulating and policing the health of our natural resource stock and minimising its degredation; making sure we maintain the condition of our infrastructure: and encouraging R&D and creativity to ensure we put those resources to best use. The private sector is not invested in these tasks and yet their prosperity and the well-being of current and future citizens are reliant on them.
The story you usually hear is that we should be concerned about how much tax is taken off us and the size of the National Debt our grandchildren will inherit. Shouldn’t our concern be that if the government chooses not to use the spending and taxing powers available to it we will be bequeathing to our grandchildren a severely depleted stock of resources and a degraded public realm? That seems to be where we are heading currently and I think our grandchildren are more likely to see us as short-sighted and selfish.
Ed: Parts Two and Three (on Debt and GDP) to follow soon …
Other articles on this theme can be found here: