As Ann Pettifor’s book was published, it was both amusing and perhaps a reflection of current times that one of the most complete and effective reviews of the Production of Money: How to Break the Power of the Bankers was in Vogue. The following are some thoughts on the economic system and some observations on Ann Pettifor’s book, which is well worth a read. It is succinct and readable, but still requires some thought and concentration.
My interest in economics has grown considerably over the last couple of years. This was prompted by a more robust anti-austerity line taken by the Labour Party on the election of Jeremy Corbyn in 2015. Like many people, I understood a nation’s economics as much like my own income and expenditure, that it was an exercise in balancing the books. So my initial question was how can a political party be serious about anti-austerity, if the books have to be balanced?
It has been a slow process of research and revelation as I have begun to understand that the way a nation’s economy works is not like a household budget. The point Yanis Varoufakis makes was a pivotal point in my own learning. He makes a very simple assertion, that in a household, business or with personal finance, income and expenditure are independent of one another. While across a nation’s economy all incomes must equal expenditure. For every buyer there is a seller. He explains in the following video.
This kind of made sense at the time, but I did not feel secure in my belief in it. I was motivated to investigate it since it represented what might be a plausible alternative explanation of the functioning of the economy. Still, it did not stop me speculating on the implications for school spending, based on the assumption that if we reduce government spending then we also reduce government income. I wrote about it here:
My understanding was quite limited at this time, the suggestions that I was making were based on the ideas that government should spend more as it would be positive for the economy. But I was still unsure about how things worked. While the things I said at the time were not entirely wrong, they were naive.
I spent last year thinking about the economy, trying to understand the implications of Varoufakis’s suggestion that income and expenditure across the whole economy are equal. And trying to assure myself that this is indeed the case.
An interesting proof is illustrated by Stephanie Kelton. She models an economy with, say, just two people in it. Transactions will only take place between those two people and therefore, across that society, all spending must equal all incomes. Now if we increase the population to three, still total spending must equal incomes. If we continue increasing the population then this fact holds true, for each income there is an expenditure.
Having read several books on economics now , it is interesting to follow this up with Pettifor’s book. She considers where money comes from and the role of credit and interest.
In the UK currency is introduced into the economy through public spending. This is true of all national economies. To illustrate this Ann Pettifor recounts the explanation Ben Bernanke gave to journalists as to how the US Federal Reserve Bank (the Fed) bailed out the insurance company AIG during the Global Financial Crisis in 2007 – 2009. Journalist, Scott Pelley from CBS’s 60 minutes, asked Bernanke, Governor of the FED, about the $85 billion bailout, “is it taxpayers’ money?” “No”, replied Bernanke and went on to explain how the Fed had simply credited the account of AIG. It had electronically created $85 billion in AIG’s account.
The source of all currency in nation states is credit, whether it be the Fed, (in the UK, The Bank of England) or in commercial banks, money is created through credit. The dollar or pound is an IOU. When governments spend money they credit the accounts of those supplying goods or providing services. This is the means by which currency enters our economic system, by creating IOUs.
It is often assumed that money is the thing with value, that it is a commodity. Ann Pettifor explicitly debunks this, money is created in order to facilitate trade and exchange. The commodity view of money is that it exchange and trade creates money. Pettifor convincingly demonstrates that the only source of currency is through credit via the central banks or through commercial banks. The important thing is that a government with its own national currency does not have to have assets in order to create currency, just as Bernanke explained above.
Pettifor’s main claim is that in a well-managed economy, “there need never be a shortage of money for society’s most urgent projects” (p. 22). If credit creation both by central and commercial banks “does not evolve into mountains of unpayable debt” then the monetary system can provide all the finance society needs. If on the other hand, by implementing austerity, we hamper growth and force private sector borrowing at high interest rates, this only benefits those in society who have the assets to invest in lucrative private finance.
Government has the power to spend, since it can create currency, which has value because it has the backing of the taxpayer; because people pay taxes currency has value.
The UK government’s decision to cut spending on health and education is not justified.
The implications for educators and teachers is that we need to better understand how the economy works and how money works. The phrase used by Jeremy Corbyn and Shadow Chancellor of the Exchequer, John McDonnell, “Austerity is a political choice and not an economic necessity” is based on an understanding of how money works in the economy. On the other hand, phrases like “fixing the roof while the sun is shining”, “tightening our belts” and “leaving huge debts for our grandchildren” are not. They are myths created by those who have the backing of the exploitative 1 per cent.
We cannot go on simply working more hours in response to political choices. We have to get educated and demand alternatives.