Individuals without an iota of knowledge confidently put forward economic policies: the need for austerity to pay back Covid ‘debts’, the need to raise interest rates to control inflation, the need to cut tax to encourage growth.
The fact that there is little empirical evidence to back any of these assertions is neither here nor there. In fact, often the empirical evidence points in the opposite direction. Current inflation isn’t caused by too much money chasing too few goods – so reducing borrowing cuts inflation? The causes of current inflation include external shocks and Brexit.
Maybe they are right to be confident in their assertions; it’s what students are being taught in our universities. It’s what I learned during my honours year studying politics and economics as part of my social science degree. And it’s what I believed myself – until recently.
Conversion to a citizen’s economic model
Over the last year I’ve experienced a conversion. I’ve got to the point where everything I read or hear from politicians or media commentators about how the UK economy works, and how to fix it – sounds to me like patent bull.
Admittedly, I’m not an economist; I’m an interested individual with education in orthodox economic models but with a ferocious desire to find out how we – specifically Scotland – can move forward in a way that puts citizens at the heart of our economic policies. How do our economic policies serve the needs of our citizens rather than the needs of arbitrary targets such as interest rate levels, deficits, ‘debt’ and control of the money supply? Our current economic models aren’t working.
But, I hear you say, if you are not an economist, how do you know they are not working?
Children in poverty; a planet being destroyed; widening inequality; political populism; a cost-of-living crisis, an erosion of human rights; everything that moves, or doesn’t move, regarded as an asset. Assets designed to generate profits: public transport, energy, health, water, land, homes, even care homes.
Tinkering with models that don’t reflect reality
And we have a level of hopelessness among not just those at the bottom of the heap, but those who regard themselves as left-leaning progressives. Many seem rudderless in their response; they can’t seem to see beyond the pervading orthodoxies; they suggest we tinker with the model – not replace it with something else. And sadly, it’s been like that since the latter half of the 19th century.
Neo-liberal economics. It has an attractive logic and simplicity; you pull one lever, and this happens; pull another lever, the economy settles back into equilibrium. You can even use mathematics; graphs can be drawn, and assertions made. Put numbers in here – and we predict that this happens. But it doesn’t.
Economies are too complex for such simple models. And the assumptions the models are based on have changed radically since the model itself was posited. Even back then, the model wasn’t a reflection of reality.
Modern monetary theory aims to explain how the economy really works
So how about this for an idea? Figure out how the economy works by looking at what it is doing – in practice. But who knows how it works in practice? Not orthodox neo-liberal economists. Perhaps ask people with experience in trying to manage it – or experience of trying to make money from it? People like Mark Carney who ran the Bank of England (BoE), he has an inkling of how it works. And former hedge fund manager, academic and economist Warren Mosler also has an inkling of how it works. It was Warren’s experience that led him to bring together the ideas that became – a new model to derive policies from – a model called modern monetary theory (MMT).
I’m not able to say that MMT accurately describes how the economy works or that it is the right way to think about the economy; but what I can say is that it tries to understand the real economy – not a theoretical one. And importantly, it is based on a different set of assumptions about what economic policies are for. They are not for controlling arbitrary figures related to interest rates, deficits, or debts. They are about looking after the welfare of a nation’s citizens. Whether I am right or wrong, that’s an aim I find attractive for an independent Scotland.
It’s time we all learned about economics. I recommend the following.
The Deficit Myth: Modern Monetary Theory and How to Build a Better Economy by Stephanie Kelton [2021, John Murray press, ISBN 9781529352566]
Soft Currency Economics II (MMT – Modern Monetary Theory Book 1) by Warren Mosler [2013, CreateSpace Independent Publishing Platform, ISBN 13: 9781482735437]
Value(s): Building a Better World for All by Mark Carney [2021, HarperCollins Publishers
Scotonomics Podcast run by Kairin Van Sweeden and William Thomson [https://thehub.scot/+Scotonomics]