The 2019 Institute for Public Policy Research Economics Prize posed the question:
“What would be your radical plan to force a step change in the quality and quantity of the UK’s economic growth?”
This was my response.
Growth For Growth’s Sake?
I like your question. The quality of economic activity is habitually ignored by those who discuss growth but it is of the first order of importance. Quantity comes second. We need to assess the practical value of what we’re doing before we decide to do more or less of it. Our step change must lead us somewhere that is desirable to go. We need a clearly-defined objective.
Too many economists, politicians, and those who report their operettas appear to be several steps removed from the practicalities of life on earth. Economics, for them, is a discipline of statistics, mathematics and finance, a set of competing theories that must be resolved into a coda that chimes with their pedagogical preferences, their world view, or their political ambitions. This cerebral, esoteric mistreatment of economics is at the heart of much of the dysfunction in the world. It erects barriers between us and the practicalities of life on earth, preventing us from seeing what we should and shouldn’t be doing in terms of economic activity.
There is nothing esoteric about economics. We all do economics every day. Every breath that we take, every step that carries us forward, everything that feeds us and shelters us, everything upon which we rely to live our lives is a gift from the economy, and all of these gifts are the results of human actions. Economics is physics. It’s the product of human brain and muscle power applied to the material world. It’s people doing what needs to be done for our collective security and comfort.
Collective is important. The die-hard good-life DIY survivalist self-made multi-billionaires are able to live their fantasies of self-reliance only because of the rest of us. None of them – none of us – can prosper without the productive efforts of thousands upon thousands of people who have the skills and inclination to make and do the things that we will never be able to make and do by ourselves, things that are essential for how we expect to live our lives.
Your prosperity relies on my willingness to do something productive and my prosperity relies on you to reciprocate. The more of us who join in for the benefit of each other the more secure and comfortable we collectively become. From the micro perspective – you in your small corner and I in mine – the logical aspiration for macro-economics is universal prosperity.
On the 7th of December 1972 the crew of Apollo 17 took a photograph of planet earth that has become known as The Blue Marble. This picture is a perfect illustration of the trajectory of human cognition. The horizons of our hunter-gatherer forebears, limited by the height of the nearest hill, have expanded, little by little, millennium by millennium. We now share a single horizon, one that inscribes the outline of the entire planet against the vastness of the universe.
We now know that we live together on a tiny island spinning in an unfathomable ocean of space, and we now know that the resources of this island are finite, that the balance of its environment on which we all rely is precariously delicate.
This knowledge is recent, emerging bit by bit over the last few hundred years, as yet imperfectly formed in our collective consciousness, still a dull nagging in the back of our minds but elbowing its way forward to deliver another dose of hard logic: our economy must also be sustainable.
Given what we now know the only rational economic objective for us, individually and collectively, is universal sustainable prosperity.
If we value our security and comfort, and those of our successors, everything that we do as economic actors must propel us in this direction. We need to question it all – what we’re already doing and what we propose to do: does this contribute directly to universal sustainable prosperity? Only if the answer is yes should we do more of it. Quality, then quantity.
So how can we force a step-change in the quality and quantity of economic growth in order to progress towards our objective of universal sustainable prosperity?
The Freedom Come All Ye
In one curmudgeonly corner of cerebral, esoteric economic wonderland the quest for growth is anathema. The resources of the planet are finite therefore growth cannot be sustained, goes the argument. This line of thinking, if valid, would knock the wheels off the IPPR Economics Prize. Luckily the proponents of the “all growth is bad” theory are muddle-headed.
If you and I both cook breakfast for ourselves in our own kitchens we use 2 units of energy and contribute zero to GDP. If I walk down the street to your house and pay you £5 to cook twice the amount of breakfast, half of which you share with me, we use 1 unit of energy and increase GDP to the value of £5. Economic growth goes up while aggregate energy consumption goes down, thanks to optimal employment of available space in your frying pan. And we’ve both had a good, sociable breakfast. High-quality economic growth making a direct contribution to universal sustainable prosperity. Let’s do more of it.
More and better. Let’s replace your gas hob with an induction one so that most of the energy is used to cook the food instead of being wasted heating up the kitchen. And let’s incentivise the design and production of induction hobs so that they are even more efficient, have a 50 year lifespan and are 100% recyclable. Let’s replace your electricity meter with one that can feed information back to the network operator so that the grid can work more flexibly and efficiently. And let’s make it easier for everyone to connect more renewable generation and short-term storage equipment to the grid so that the breakfast is always being cooked by the power of the sun, even when it isn’t shining on our street.
There are billions of pounds of high-quality economic growth gestating in that last paragraph, growth that will make a massive contribution to our journey towards universal sustainable prosperity. So says the optimist.
The pessimist (he’s never far away) reads between the lines and spells out the problems that lurk therein. Thousands of jobs are reliant on the gas extraction and supply industry. Thousands more on the designed obsolescence of domestic appliances. The electricity supply industry’s profits are built on the premise of selling as many kilowatt hours as possible while investing as little as possible in generation and distribution infrastructure, and these profits support financial and fiscal infrastructure that, directly or indirectly, provides millions of people with their livelihoods.
The engineers tell us that all of the things in our good-growth-pregnant paragraph are technically do-able, but the pessimist, posing as pragmatist, tells us that they can’t be done because the sums don’t add up: it doesn’t make economic sense to invest in technology that will put people out of work and reduce profitability. Economic reality, from this perspective, demands that we keep burning gas, keep producing disposable appliances, keep maximising profits from electricity sales.
But we’ve already established that a) economics is physics and b) the objective is universal sustainable prosperity, so what’s the problem? Why can’t we let the engineers get on with applying the physics that will help us to get where we need to go? What is this “economic reality” that trumps universal sustainable prosperity, preventing us from doing the right thing?
The answer is money and jobs. Big lumps of economic realism that anchor us to the status quo.
Our economy is arranged in such a way that we all need spending money in order to survive, and paid employment is the primary mechanism that we use for pumping spending money through the economy. The economic activity of employers and employees generates this flow as wages, dividends, pensions, social security payments and so on. Any major disruption to this arrangement means that lots of people struggle to get hold of the money that they need to keep their lives on an even keel.
The optimist will tell us that the lost jobs will be replaced by new ones as the sustainable technology revolution gathers pace, but that’s no consolation for the people who can’t pay the mortgage and feed the kids during the transition. We can’t put the physics of our individual economies on pause while the job market sorts itself out.
Our reliance on paid employment as the primary method of circulating essential spending money through the economy means that the bulk of the productive workforce is necessarily locked into doing whatever jobs they are currently doing. It’s a rigid system that can cope with only minor, marginal change. The scope and scale of change that is required for our economy to shift towards universal sustainable prosperity cannot be accommodated. Disrupt too many jobs at one time and the whole fabric of the economy collapses.
Mass wage slavery is an essential feature of the system’s overall design, making it impossible to manage the effects of significant disruptive change, but this enslavement of the productive half of the population is also a serious problem at the sharp end of the economy, severely restricting our ability to make useful disruptions happen in the first place.
The pool of talent that has access to the wherewithal to initiate and execute change in the world is depressingly small.
Set X: people who have the ability and inclination to make things happen – a big number.
Set Y: people who have access to the time and money that are required to make things happen – a small number.
Set Z: people in the intersection between X and Y – a tiny number.
These people in Set Z are the ones who have the power to change the world, or not. They decide, by and large, what we do and how much we do of it. The quality and quantity of our collective economic effort is limited to the imaginations and predilections of this tiny cohort of humanity.
The voyage to universal sustainable prosperity will not be plain sailing. If we’re going to get there anytime soon we need to use the ingenuity and creative energy of as many people as possible. The incumbents of Set Z are too few and too limited in their vision and ability to do the job for us.
If our step change in the quality and quantity of economic growth is to happen we must dramatically increase opportunities for people to create, initiate and direct what we do in our productive economy. Wage slavery is clearly inhibiting the productive potential of the population at large as well as restricting our ability to manage disruptive change, so…
Requirement No.1: a mechanism for distributing essential spending money that is independent of paid employment.
Money, Money, Money
Let’s imagine that we’ve successfully dealt with Requirement No.1, that we each have a source of spending money of sufficient quantity and reliability to allow us to survive extended periods without paid employment. Some of us will spend the time thus liberated on home improvements, or taking care of others, or expanding our learning, or recharging our batteries until a new job comes along. Others will apply themselves to innovation and enterprise, spotting gaps in the market, developing new and better ways of doing things, making optimal use of the available space in the frying pan.
Every innovation, every new enterprise needs money to make it happen. The vastly expanded shoal of talent that is released by abolition of wage slavery will be stuck splashing about in the shallows unless it can get access to seed funding and venture capital. The super-efficient 100% recyclable induction hob with a 50 year lifespan won’t appear in the shops by magic. Designing it, developing it, producing it, marketing it, means spending money that most liberated wage slaves don’t have it.
Those who do have the money, the occupants of Set Y, are generally disinclined to spend it on anything productive, let alone innovative. In a typical quarter in 2017 the UK money supply was around £2,300 billion (BoE) while business investment was less than £46 billion (ONS). We use a few billion pounds of the money supply for day to day transactions but that still leaves at least £2,200 billion lying idle or being used for unproductive financial gambling.
Our culture teaches us to grab as much money as we can and then hold onto it. Those who are good at grabbing are also very good at hoarding, which means there are slim pickings for enterprising innovators who are in need of investment.
Which brings us to the banks. Somewhere along the way we allowed privately-owned companies – banks – to profit from creating money in the form of loans. The more a bank lends the greater its income from fees and interest, so we might hope that the banks would be eager to fund the innovative enterprises that will propel us towards our objective. Sadly not. Lending to the innovative end of the productive economy is unattractive for a bank. It requires a great deal of oversight for limited reward and carries significant risk of failure. There are much easier pickings to be found in the likes of the domestic mortgage market and corporate financial engineering: profitable activities that contribute little or nothing to productive economy.
Our newly-liberated legion of innovators might as well de-mob themselves and return to wage slavery in the face of this dearth of money to invest in their enterprising ventures, unless something changes.
Requirement No. 2: a mechanism to encourage the deployment of idle money towards productive activity.
Despite attempts by free-market enthusiasts around the world to convince us otherwise, the private sector of the economy has proven to be ill-suited to, or incapable of, doing much of what we need to do for our collective security and comfort. There are some things that are more effectively provided through common ownership and action than via the commercial marketplace. Making these things happen requires co-ordination of effort, locally, regionally, globally.
Easier said than done. Our governments, local and national, aren’t famous for their ability to do the things that we need them to do. Our roads are littered with potholes. Our schools are under-resourced. Our health services are creaking at the seams. Homelessness and food poverty are rising year on year. Colossal amounts of energy are squandered bickering over flags and borders and who gets to make decisions about what. There is something rotten in the state of our public sector economy.
In politics, money is power. The quality and quantity of public sector activity is limited by the amount of money that’s available and the capabilities of those who make decisions on how to spend it. If we want high-quality growth in the public sector economy we need high-quality decision-making and the cash to back it up.
Those who control the public purse have absolute power over the public sector economy. In the UK this power is ultimately concentrated in the hands of a tiny group of people who sit at the apex of government in Westminster. This group cedes a portion of spending power to the devolved administrations in Scotland, Wales, and Northern Ireland where the concentration of control is replicated. From these four command centres meagre portions of spending power are handed down to regional authorities and agencies whose leaders, another layer of centralisation, exercise absolute control over the budgets of their fiefdoms.
This concentration of power makes civic leadership a game of winner-takes-all and devil-take-the-hindmost. Accession to power via election or appointment is a high-stakes dogfight for which few of us have the stomach so the pool of talent from which our politicians and senior civil servants is drawn is tiny, more of a puddle than a pool, reduced to those who are cursed with more than their fair share of hubris and blessed with an uncommonly thick skin. Those who rise to the top have both of these in spades.
The range and quality of public sector activity is thereby limited to the imaginations, proclivities and competence of this little band of unusual individuals, and those who have their ear. All centralised elites are vulnerable to lobbying. People with particular interests to promote take advantage of the concentration of power: fewer arms to twist; fewer backs to scratch.
But even if everyone in our governing class was gifted with outstanding intelligence and unwavering resolve to do the very best for the population at large they would still fail. It is not humanly possible for such a small group of people, no matter how good their intentions, to understand the diverse needs and preferences of our communities let alone direct resources from the centre with sufficient flexibility to provide satisfaction. What works for the islanders of Unst isn’t necessarily going to do the business for the inhabitants of Thurso, never mind the good folk of Govan, Gateshead or Golders Green.
The public sector of our economy is in desperate need of high-quality growth if we are to have any chance of reaching our objective of universal sustainable prosperity, but we cannot hope to achieve this growth while the strategic decision-making for our collective actions, and the means of financing these decisions, are controlled by small, remote, centralised, ignorant elites.
Requirement No. 3: mechanisms that allow communities to a) decide what to do for the common good, and b) provide them with the means to do it.
Let’s Do It
In reverse order.
How can we meet Requirement No.3?
Possibly the most trite, infuriating and mendacious trope of modern times is the favourite whine of self-styled fiscally-responsible politicians: “There isn’t a magic money tree, you know.”
There are, in fact, two such arboreal wonders, one of which takes the form of the Bank of England (BoE). Thanks to our fiat currency we can, via the BoE, create money out of thin air in infinite amounts at almost zero cost. The only potential snag is inflation due to over-supply but there are plenty of mechanisms that we can use, familiar and novel, to make money disappear back into thin air, so refusing to fund activity that contributes to our economic objective on the grounds that it might over-inflate the currency is allowing the tail to wag the dog. Money must be the servant of productive activity, not its master.
Local authorities and qualifying community organisations should be able to apply directly to the issuer of the currency for funding whatever public services and projects they decide that they need, so long as they can find people who are willing and able to do the work.
Applications should be standardised and completely transparent. The names of the individuals who have instigated the activity and those who have committed to do the work should be listed along with their roles and the remuneration that they will receive for their efforts. Likewise for the proposed inputs from suppliers of materials and equipment.
If the application meets standardised value-for-money criteria then the funds should be provided automatically. Once underway the application should become a dynamic open record of the progress of the activity, recording changes to personnel and suppliers and the products of their labours.
This mechanism will create a step change in the quality and quantity of growth in the public sector economy. No longer will our local public services be constrained by the artificial metric of available revenue or by the limited capabilities of a centralised elite. The only constraint will be the skills and commitment of the population to do useful things for the common good.
The amount of money introduced into the economy via this mechanism is limited by physics – the availability of human labour and material resources – but if you’re still fretting about the inflationary potential of this concept, take a deep breath and read on.
Requirement No.2 demands a mechanism for encouraging the deployment of idle money towards productive activity.
Governments claim to be able to do this by lowering interest rates and providing tax-avoiding investment opportunities, but recent years of interest rates nudging the lower bound and a slew of underperforming fiscal investment incentives have exposed the lie. Corporations and individuals keep piling the zeros onto their bank balances while the productive economy stagnates.
As a means of exchange – a way of facilitating useful activity – money is pure genius. Abusing this genius by stuffing as much money as we can into our bank accounts and leaving it to rot is a profoundly stupid feature of our culture, preventing us from doing much of what we need to do to reach our objective of universal sustainable prosperity. Time for a cultural revolution.
Our fiscal system is awash with taxes that inhibit productive activity. Income tax, national insurance, VAT, and corporation tax are the primary parasites, sucking the life out of the productive economy. Far better to abolish these and tax idle money instead.
Negative interest charged to every bank account in the land (including those of government) at a rate that’s just low enough and just high enough is what we need. Low enough to retain our participation in the transaction system. High enough to encourage us to do something useful with our spare money.
If our bank balances are leaking at a rate of some hundredths of a percent every hour then we’re going to be very inclined to do something with our idle money. At the very least we’ll want to protect its value by lending it, interest free, to someone who has an immediate use for it (think of two thriving businesses at different stages in their product cycles: one cash rich and the other cash poor). And those of us with an appetite for enterprise will be more inclined to invest some of our spare money in activities that look as though they might be profitable.
For an economy to thrive money must be available and mobile. Negative interest ensures constant availability and mobility. And it has some useful side benefits.
The rate of negative interest can be adjusted to increase or decrease the flow of money through the economy. Increase the rate and we’ll be keen to use our money sooner. Decrease the rate and we’ll be a bit more relaxed about leaving it in the bank for a bit longer. This is a much more effective control mechanism for an over-heating or underperforming economy than is currently available because it adjusts the rate of loss for everyone rather than the rate of reward for a few.
Day-to-day government spending that can’t be sensibly funded on a project basis by central bank money creation (as described above) can be part-funded by borrowing idle money at zero cost from those of us who are eager to avoid negative interest but unwilling to incur the risk of lending to or investing in private enterprise.
But the biggest change for government revenue and expenditure will be the social security budget, which brings us to Requirement No.1.
The money that’s leaking out of our bank accounts as negative interest can be collected into a central pot and distributed in equal share to the entire population every week or every month. The value of this periodic payment can be sufficient to cover our essential spending: a full universal basic income (UBI).
Wage slavery and pauperism are thus abolished. The productive capacity of millions of people is liberated, increasing the opportunities for enterprising activity by some orders of magnitude, giving us all the power to say, “No, I’m not going to do that work because it doesn’t contribute to our objective of universal sustainable prosperity. I’m going to do this, which does.”
For the majority of the population who have savings of only a few hundred or a few thousand pounds UBI will more than compensate for the money that’s lost via negative interest. If you have another source of income that covers your living expenses, UBI of, for example, £1,000/month will offset the negative interest on more than £40,000 of savings, which most people would consider plenty to cover proverbial rainy day expenses.
As well as liberating us individually UBI funded by negative interest frees government from the straight-jacket of our archaic and counter-productive taxation system. UBI eliminates the need for most subsistence social security payments and it reduces the public sector wage bill by a significant amount, all of which means a massive reduction in revenue requirements.
Stupid taxes, the ones that discourage productive activity, can be replaced with taxes that incentivise behaviour that will help us to reach our objective. A carbon tax becomes an equitable option. The transition to land value tax becomes much easier to manage.
Each of these mechanisms – universal basic income, negative interest, and direct funding of our local public sector economies – brings its own challenges as well as opportunities. There is no golden bullet.
But, in combination, these concepts amount to a comprehensive reform of our monetary system from one that was designed by bankers to make bankers rich to one that’s designed to facilitate productive activity. Crucially, the proposed system allows us to make a step change in the type of productive activity that we pursue. We can choose to do more of the things that will help us to reach our objective and less of the things that are holding us back.
Growth – towards universal sustainable prosperity – is good. Collaboration is the only way to make such growth happen. Money, as a tool for facilitating collaboration, is genius – possibly the cleverest thing that we’ve ever invented – but we’re using it in the stupidest possible way. We can and must do better.