Societies aren’t big households

I remember when the Millennium Dome was being built, while people were talking about how much of a waste of money it would be, thinking that talking about how much it costs makes no sense.  Still, all public expenditure is presented as costing money. This is little more than a scare tactic built on top of a framework of thought designed to mislead us about how our own society actually works.

We are told that the country is like a household. It has expenses and incomes. Public sector costs money… which is bad because costs are bad. The private sector makes money which is good because that’s what pays for things. When we are presented with the possibility of public spending, in any discussion, for any cause, the first step is always to establish that it is primarily a ‘cost’. All other perspectives on the matter eventually must rest on this apparently unmovable bedrock of axiomatic reason.

Unfortunately this a crayon drawing of the world.

Anyone who talks about monetary cost while talking about the economy is either trying to mislead or has been misled themselves [1]. It costs money to build a Millennium Dome, if you look at it as an isolated transaction, but we use the money to buy things off ourselves and pay ourselves to produce things for ourselves. Public debt is money lent off ourselves to buy things off ourselves and pay ourselves to produce things for ourselves. One entity’s cost is another’s revenue. This is why talking about public sector spending as a cost is immediately misleading. It goes from misleading to dangerous when it’s used to argue against vital public services.

This, of course, doesn’t mean that public spending is always good, or always inert. What it means is that the factor of ‘cost’ is a fictional factor, so it’s not just that other factors are more relevant, cost in the normal sense isn’t a factor at all.

Look at it this way. Lets imagine that we suddenly discovered a way to solve all of our problems but it would require £1 trillion trillion to be spent by our public sector. Obviously this would probably not happen but how likely or plausible it is is irrelevant. What is relevant is this question: “Why care how much it costs?” All the money will be spent in the economy and simply recirculate. It would be spent on labour and supplies bought off ourselves. A tax hike would be needed to make it happen in a reasonable time, but again the money would just bounce right back out into the our pockets. Effectively the money is an inert factor, it’s just a financial medium that must be pumped around [2].

My point is that reason tells us that while a “solution to all of our problems” is worth any sum of money, received wisdom dictates that that doesn’t matter because the above is physically impossible. The cost is too high for us to pay regardless of the benefits. The argument would be posed like this: “there’s no point considering something you don’t have the means to pay for”. A household could buy a helicopter to solve all their transport problems, but a helicopter would be too expensive so there is no point in thinking about it… right? This is a nonsense comparison because the household wouldn’t buy the helicopter off itself. In technical terms the household isn’t a closed system, society is [3]. The real consideration should really be “how can we expand the money supply in order to achieve this?”, but such a question is really just monetary speak for a very obvious question “how can we do what we need to do?” because since we live in a world in which doing something usually requires financing, expanding the money supply is just a symbolic representation of undertaking new activities on faith that they will be somehow productive.

So what are the really relevant factors?

There are better or worse ways to spend money simply because there are better or worse courses of action to pursue. The effects of the action to be undertaken is most important. The question should be  “is this the best use of our time?” Expanding the money supply by, say, £1 billion is really expanding our economic activity by work notionally worth £1 billion. So, the factor that is important is, again, is this the best use of our time? An intrinsic implication of that question is “would this be sustainable?”. If the course of action, in it’s early stages, stopped us from doing things that are important (like obtaining food) then the project is clearly not the best use of our time. So the above thought experiment is irrelevant not because it is unlikely but for the single reason that we don’t have a “solution to all of our problems” to consider.

But, this is not how we approach the idea of public spending. We just look at a number and decide it’s too big. If the number represents the magnitude of work that needs to be done, this means that we have created a way of thinking that makes it impossible for us to consider large scale progressive changes. What I mean is that if a public project is expensive, that simply means it is a lot of work. Important things that are worth while will be a lot of work. So by thinking in these terms, that we can’t ‘afford’ to do important things, we are arbitrarily limiting our own progress.

There is, however, a real problem with public spending. As I said: any money spent will bounce back into the economy and into our pockets, but not necessarily uniformly. The money will dissipate through the economy but how it dissipates depends on the mechanics and structure of the economy itself. Some arrangements of the economy will result in money tending to spread completely uniformly. Other’s could result in money tending to mount in the bank accounts of some more than others. This is a feature of the economy itself so the same is true for all money. Or, in more real terms, all action undertaken in the economy will cause movement of money that will always follow the same rules of dissipation. This argument applies to both public and private spending, so can’t be leveled at public spending selectively.

The topology of our economy, and the world-wide economy, is designed such that a tiny fraction of the population benefit from the mechanics of how money moves around it. The goods and services we buy, through complicated legal fictions, belong to a surpassingly small number of companies. Most of the brands in supermarkets, for example, are really sub-brands of a few holding companies. The energy system is controlled by seven companies. Something similar is true of the food system, pharmacology, media, electronics and security. Above all of that, abstracted from the daily realities of actually doing productive work or market volatility, are the financial, legal and public relations industries, who benefit from and therefor levy an economic rent on everything we do.

This doesn’t have to be the case. There is no law of nature that says it has to be like this and even if there were we’d have no reason to take any notice of such a law.

[1] The same is probably true if they use the word ‘Keynesian’

[2] You could argue that such a project is already underway.

[3] You might have noticed that any country’s economy is only a closed system if it doesn’t trade with other countries. That point is valid, although you could take the world as one large macro-macro-economy which is a closed system. In the case of the Millennium Dome, or any other publicly funded venture, the extent to which work is contracted to foreign entities is not really the focus of the objection. How much private enterprise is contracted to foreign countries? In any case a country’s economy is far more closed than a household.

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