I pretty much make it a matter of policy to ignore whatever Tom Worstall has to say.
Tom? It’s not even good publicity, is it?
So far, so good. It is indeed true that there need never be a shortage of money. But Worstall continues, saying:
The underlying error is that economics isn’t the study of money. Sure, monetary economics is interesting enough, but that’s not the core of the subject. Instead, we note that there are unlimited human desires but only scarce resources with which to sate them. Changing the amount of money in circulation doesn’t change the number of those wants, however, nor the resources we have with which to satisfy them. It only changes the counting we’re doing as we do so.
Before you throw your hands up in horror I should note that Worstall does reveal here his deep knowledge of, and unfaltering belief in, neoclassical economics. What he is saying is wholly orthodox economic teaching, taught day in and day out in universities across the world. It is quite literally the case that in general equilibrium based macro economic thinking, which dominates the thinking and teaching on this subject the world over, that money is effectively ignored. As too, incidentally, is taxation.
The study of an individual market is partial equilibrium, not general. Further, general equilibrium is microeconomics, not macro. Even, money is not ignored, it was there in Walras’ first model and has continued, in general, to be there since.
Failure to appreciate this permits Worstall to make some pretty wild, and glaringly false claims. For example he says this
Because it’s the resources which are scarce. Take health care, for example. There’s the labour needed to do it, the buildings to do it in, the implements with which we do it and so on. But at any point in time there’s only a given amount of each of those things. Increasing the money supply doesn’t increase the amount of any of them.
Of course, the economy is not a zero-sum game, it is always possible to train up or import more labour; we can build more hospitals, make more medical equipment. But more money doesn’t increase the resources from which we can do all of those things.
Three thoughts follow. First, there is the most extraordinary suggestion implicit in this that the availability of money demand within the economy does not change behaviour. Or to put it another way, that if more money is dedicated (whether by tax or not does not matter) to healthcare demand then there will be no reaction to this monetary stimulus in the real economy and nothing will happen as a result: no new health care will follow. What Worstall is saying here is that demand cannot apparently alter supply in the real world.
Well, no, I don’t. Instead I talk about total resources being, at any point in time, fixed, meaning that if we wish to divert more resources to health care hen w will, inevitably, have less of something else. We can indeed increase total resources over time. That’s not what he says I say at all.
Second, what he’s also saying is that if there is underemployment in an economy working at less than full capacity (both of which are true in the UK at present because we suffer massive disguised unemployment in the form of under-employment) then adding to the money supply cannot stimulate a greater supply of goods and services to the economy. This is glaringly obviously untrue. He also ignores the positive multiplier effects of such spending in that situation, although they are now widely documented.
I also don’t say that. What in fact I do say is:
It is possible to get all Kenyesian about this and say when in recession we can boost output of all things – and maybe there’s some truth to that. But that’s not what our simplistic money tree peeps are saying. Instead, they are insisting that because we can print more money then there’s no shortage of the resources we need to do whatever we want. Which is, of course, complete tosh.
When we’re at full employment, about where we are, when GDP is about at potential, roughly where we are, then the only method by which we can have more of something is by having less of something else. Or, of course, by increasing the efficiency through which we produce things from our scarce resources over time. Neither of these options is waved away, aided nor hindered by printing more money.
I don’t even claim this:
Which is a pretty big claim, because what he is actually suggesting is that using money as a mechanism to direct resources towards investment has no impact on outcomes in the real world, when that is very obviously untrue.
Instead, all I’m saying is that increasing the amount of money does not increase the amount of scarce resources.
In which case he needs to explain why he is so obsessed with preserving the right of money to hide in tax havens, and why he is so obsessed with preserving existing monetary wealth distributions, and why he is so opposed to progressive taxation that might redistribute this money that he says has no impact on the well being of those who own it.
I’m not, I’m not and I’m not.
Except that he hints at the answer to all these three questions in one telling paragraph where he says:
Money’s just the way we count who controls those resources, it’s not a measure of what we can put to work at all. Thus printing more money doesn’t alter the fact that we must still choose which activities we’re to devote what resources to, there is no get-out clause here.
But this is not true. Because if in the process of printing money we change who controls resources we really do change outcomes.
But that’s not my point Senior Lecturer, is it? Rather, that the scarce resources are still scarce whoever directs their use. Thus, use of more resources to do one thing means fewer to do some other.
So in fact what Worstall has written indicates three things. The first is the bankruptcy of conventional macroeconomic thinking to which he, and the greater part of the academic community, subscribe.
General equilibrium still isn’t macroeconomics.
Actually what’s true is we can’t do everything, but that changing the way we control money by letting government print more of it to achieve social goals can very fundamentally change our constrained reality.
Shrug. Sure. Who gets to spend the money will indeed change what it gets spent upon. And? That still doesn’t mean that doubling the number of pound coins increases the scarce resources we can devote to the health service.
As an example of failed reasoning Worstall takes some beating. Buy don;’t expect me to engage with him again: once a decade is enough when faced with folly of this level.
Wonder if he’d listen to someone he trusts as they explain his errors?