THERE will be some National readers who will have noted that I was none too enamoured with a comment made by Lucy Powell MP, a Labour shadow cabinet minister, that there is no money left for Labour to spend if it gets into office at the next General Election.
Watch the video, and you will get a sense of my anger and disgust at this comment, which is financially illiterate. So significant is this issue, however, that I feel it worth exploring a little further in this column.
@scotnational Labour claim there's 'no money left' 🤔 Economist Richard Murphy says that's wrong and BRILLIANTLY explains why #labour #labourparty #westminster #sirkidstarver #keirstarmer #indyref2 #scotland #fyp ♬ original sound - The National
Most economists argue that money has at least three functions within an economy.
The first is to provide a medium for exchange. In other words, we need there to be enough money to let us undertake the transactions that we do in our economy, which is wholly money based.
Secondly, money is a store of value. There are two dimensions to this. First of all, this means that money is simply a way in which savings can be recorded. Alternatively, some claim that this means that there is a duty on a government to limit inflation to ensure that money maintains its value over time. I would say both are true.
Thirdly, money is a measure of value. In other words, we use money as a way of expressing the fact that we think one thing is worth more than another, in much the same way as we use miles or kilometres to record the fact that the distance between Glasgow and Edinburgh is shorter than that between Edinburgh and Aberdeen.
All three of these uses for money are important. They are, of course, also intimately related to each other. It is obvious that the measurement of value that we create using money helps us decide what transactions we will actually undertake in the economy. Just as importantly, if we wish to save for something that we value, but do not yet have the means to buy, then we want money to be a store of value that is reasonably stable over time. As a result, money is important to us. It is one of the fundamental tools that we use in the economy. It also shapes in really significant ways our view the world and what we think to be important within it.
READ MORE: Labour can't say if they'll get rid of Bedroom Tax
So where are politicians going wrong?
Given these facts, it is really unfortunate that so few politicians bother to understand what the role of the government when it comes to money. As I have explained in a previous column, most of them seem to think that money is made by anyone but the government. That is why they keep referring to taxpayers’ money.
They are, however, wrong to do so. To give money its value it has to be in short supply and that can only be true if just one organisation is responsible for making it – which is our government.
If (as is glaringly obvious when you think about it) only the government can ultimately create money then there is no such thing as taxpayers’ money. There is, instead, only government-created money. And if there is only government-created money then it should be equally glaringly obvious that the government can never run out if money – because it can always make some more.
How does that work?
In fact, given that money has no tangible or physical existence as such – because even notes and coins are actually just records of debt owing by the government and debts can never have either a tangible or physical existence – then all that money can ever be is a record of debt, usually maintained by a bank. They measure the existence of money by printing a number on a bank statement – which is all there now is to the claim that there is "money in the bank".
And since that makes money into something which is no more than a measure, just like miles or centimetres, then it is something that can never run out because just like kilometres and inches money only exists in relation to something else. In that case the idea that money might (or even has) run out, as expressed by Lucy Powell, is most especially absurd. We can never run out of a measure.
READ MORE: Richard Murphy: How the odds are stacked against Scotland's economy
What is the duty of government when it comes to money?
It is simply stated. It is to spend enough of it into existence (because that is the only way in which it can be created) to ensure that there is sufficient money for people to use to undertake the transactions that they want to record in the economy, and to save the amount that they desire (including with the government if they wish by either buying government bonds or saving with NS&I).
It also has a duty to maintain reasonable price stability as best as it is able – whilst knowing (as does everyone) that this is never entirely achievable and that the gradual diminution in the value of money that we have seen over the last century or more is now inevitable.
What this means in practice is that the government has to spend enough to keep the money supply topped up, which it does by not taxing all that it spends back ie it must run deficits.
It also means that the government must provide the opportunity for people to save with it – because they are the only organisation capable of guaranteeing that what is saved with them will always be repaid.
And it must ensure that fair value is maintained. But that never requires that a government impose austerity, as Lucy Powell suggested. It simply means that if the government finds something that needs doing then it can always do it and also control inflation so long as it can guarantee to take the new money it has made whilst undertaking that task out of use in due course, which it does via taxation.
READ MORE: The Bank of England wants to frighten workers into submission
So what should Lucy Powell have said?
What Lucy Powell could have said is that Labour thinks it has run out of opportunities to tax and so cannot spend any more and still control prices. That would have made sense.
Except, that is, for one thing. And that is that there are massive opportunities to raise tax in our economy. I estimate that if the wealthiest paid tax on their increases in wealth at the same rate as the rest of us pay tax on our increases in income, then Labour could raise up to £170 billion a year more in tax.
So, yet again, Lucy Powell’s comment makes no sense unless we interpret her comment in one last way, which is that Labour intends to run a government that will serve the interests of the wealthy in the UK, and those of no one else.
Put like that Lucy Powell’s comment is completely comprehensible. But it is not any other way.
Why are you making commenting on The National only available to subscribers?
We know there are thousands of National readers who want to debate, argue and go back and forth in the comments section of our stories. We’ve got the most informed readers in Scotland, asking each other the big questions about the future of our country.
Unfortunately, though, these important debates are being spoiled by a vocal minority of trolls who aren’t really interested in the issues, try to derail the conversations, register under fake names, and post vile abuse.
So that’s why we’ve decided to make the ability to comment only available to our paying subscribers. That way, all the trolls who post abuse on our website will have to pay if they want to join the debate – and risk a permanent ban from the account that they subscribe with.
The conversation will go back to what it should be about – people who care passionately about the issues, but disagree constructively on what we should do about them. Let’s get that debate started!
Callum Baird, Editor of The National
Comments: Our rules
We want our comments to be a lively and valuable part of our community - a place where readers can debate and engage with the most important local issues. The ability to comment on our stories is a privilege, not a right, however, and that privilege may be withdrawn if it is abused or misused.
Please report any comments that break our rules.
Read the rules hereLast Updated:
Report this comment Cancel