Putting the leaves on the Magic Money Tree

Putting the leaves on the Magic Money Tree, seeking a radical Liberal approach to economics.

Fairness and the pursuit of it is essentially the purpose of the Liberal Democrats. If that is the case, how then do we expect to be taken seriously without that we have a radical agenda for economic reform?

The last 40 years of our national political story has been dominated by the Thatcher / Reagan /Hayek economic experiment. It has failed. If we agree that to be the case, then it is essential that rather than pretend to seek a better way to manage the status quo (in just the same way that we are supposed to be able to grow an economy without equality of access with our competitors to our nearest and largest market) that we commence the task of considering alternatives.

Free from the constraints of any economic dogma we are free to consider options in the widest and freest sense. Essentially, I believe that our core instinct is one where intervention and constraint of seemingly uncontrollable forces are our natural territory. Capital is like water, if left unchecked it will seek the easiest route. Unlike water, capital fails if it does not engender belief in those then required to consume its final output.

To this end the Social Liberal Forum are commencing on a series of events looking to consult and define a new exciting, entirely radical, free approach to economics.

We accept that this is perhaps the start of a long journey, but it will be fascinating. When the question is asked ‘What’s the point of the Lib Dems’ to which a core reply must be ‘to defend citizens from suppression by those with influence and power’ our aim is to arrive at a place where all those that are reliant on a functioning economy appreciate their place within it but also their responsibility for ensuring that it works to the benefit of all citizens.

To begin this conversation, and to set the ball rolling on the 27th July, the Social Liberal Forum’s first event in the series is being held in front of a live audience at the National Liberal Club. This event will see Sarah Olney MP, Treasury Spokesperson in conversation with Will Hutton, leading economic journalist, and Observer columnist. Author of the best-selling “The State We’re In”.

Audience tickets are free but limited but please email, [email protected] to secure any remaining tickets.

The event is also being streamed live; to register please click here. After registering, you will receive a confirmation email containing information about joining the meeting.

The event will also be recorded and then made available via the SLF web site.

This event is then being followed up with a next instalment at national conference. The best way to help us is also of course to join our movement at Socialliberal.net.

* John Shreeve is a Member of the Social Liberal Forum Council, an Elected member of Federal Policy Committee and Eastern Region Treasurer and chair of Suffolk County co-ordinating committee.

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30 Comments

  • David Warren 20th Jul '23 - 3:27pm

    All this is very welcome.

    Hopefully it will result in an updated website for the Social Liberal Forum and some visibility on social media.

  • Simon McGrath 20th Jul '23 - 6:26pm

    “”Unlike water, capital fails if it does not engender belief in those then required to consume its final output.” What on earth does this mean ?

  • Chris Moore 20th Jul '23 - 8:43pm

    I believe it means, capitalism will fail – fall? – if it doesn’t have the support of those at the bottom – “those then required to consume its final output”.

  • I’m not sure what this article is really getting at, but often exciting and radical approaches to economics involve public spending without taxation to pay for it and some sort of smoke and mirrors to conceal this.

    Usually the argument proceeds along the lines that money isn’t very real anyway, and it gets created by the banks, so why doesn’t the state just create it to spend it. And it won’t cause hyperinflation this time because, er…

    I do think Liz Truss is guilty of this sort of thinking with her budget that lost her the confidence of the markets. That it was for tax cuts rather than spending doesn’t alter the principle here.

    The problem is that while money is kinda somewhat fictional, an amount of money represents an amount of human labour which is real. Saying we can spend and nobody has to pay for it, is a bit like saying some important work can be done and nobody has to do it. Put this way we can see the futility of trying to achieve this with a radical new dogma free approach to economics.

  • Peter Martin 21st Jul '23 - 4:43am

    @ Joe Otten,

    I’m not sure what the article is getting at either and I suspect neither does the author. But we’ll no doubt see more in due course.

    The notion, which it looks like you agree with, that Government spending totally depends on taxation and that Government borrows any extra it might need doesn’t answer the question of where money comes from in the fist instance before it is available to be collected in taxation or from the sale of Govt bonds.

    The mainstream shies away from this question. It isn’t a particularly scientific approach which does need to be rectified. IMO.

    Incidentally you seem to be in agreement with Marx on a labour theory of value! 🙂 Most modern economists aren’t though.

  • Mick Taylor 21st Jul '23 - 6:07am

    According to Modern Monetary Economics, currency issuing governments can spend money and indeed create it with the important proviso that they control inflation. Government spending creates income which is then taxed and also brings in other taxes. But the critical difference to orthodox economics is that MME accepts that spending precedes taxation, whilst our party, along with all the rest prattles on about getting tax to pay for spending and talks about putting the cost onto future generations. It will be interesting to hear whether orthodox economics is still Sarah Olney’s policy or whether she is willing to be more radical.

  • Chris Moore 21st Jul '23 - 8:26am

    Unless you believe that spending and taxing can be analysed down to the level of individual packets, which are then associated like quantum particles at spooky distance, and given a chronological order, it’s not possible to say spending precedes taxation or vice versa.

    It should be clear that there is a cyclical relationship between public spending and taxation.

    In reality, those who believe in opening the spigots claim spending precedes taxation, whilst those who claim the reverse don’t. Saying “spending precedes…” or “taxation precedes…” has no objective correlate in observations in the economy. How could it?

    MME is an interesting model of the economy, but no more than that; it’s nearly always bastardised on LDV to mean you can open the spigots with zero or scant consequence. Sadly not.

  • Mick Taylor 21st Jul '23 - 9:19am

    @chrismoore. First of all you should read Stephanie Kenton: The Deficit Myth. Spending has to precede taxation. The government spends money. That creates income for government employees and suppliers. Then they pay tax on their income. Without the spending there is no income to tax. I have long argued that MME needs serious consideration, but nowhere have I not included the two important provisos: controlling inflation and being a currency issuer. I know new ideas are often difficult to accept, so was changing from cutting government expenditure in an economic crash to Keynesian Economics. Our party may, alas, be too timid to radically challenge orthodoxy, but unless we do, then we will continue to be just a pale shadow of other parties.

  • Mick Taylor 21st Jul '23 - 9:22am

    Oops, predictive text strikes again. Kelton not Kenton

  • Hello Mick,

    I spent several years of my life studying economics (along with more useful subjects, fortunately) when I was at University. And am reasonably well acquainted with MME. If Stephanie Kelton’s book breaks any new ground, I’d read it. But I think it’s a tertiary, explanatory text. MME isn’t a new idea at all, having been around for decades.

    You repeat the claim that (government) spending precedes taxation; there is an epistemological problem with that claim that I tried to draw attention to in my previous post.

    Are you trying to rival Peter (Martin) as LDV’s MME prophet? I honestly think he’s got that role sewn up.

    But let’s not bastardise MME. It really doesn’t imply increased marginal utility for extra spending.

  • Steve Trevethan 21st Jul '23 - 10:42am

    Thank you for your article which is thought provoking and so valuable!

    Mr. Richard Murphy is well worth reading on the matter of spending-with-taxation.

    An equitable, clear, spending-with-taxation set up, along with an electorate well educated in socio-economics results in an equitable, sustainable society.

    “The Joy of Taxa” by Mr. Murphy is a good start.
    https://www.taxresearch.org.uk/Blog/2021/02/25/labour-needs-to-learn-about-the-joy-of-tax/
    https://openaccess.city.ac.uk/id/eprint/16536/

  • Yes, Martin, that’s certainly right. You have got to the heart of it.

    And the rub is this: even though the UK issues its own currency, its economy is, of course, anything but hermetically sealed. No modern economy is.

    MME is a beautiful, but very flawed model of currency issuing economies; it really tells us not very much at all about day-to-day spending decisions.

  • Denis Mollison 21st Jul '23 - 11:30am

    PS – I recommend (along with much of what Richard Murphy writes) –
    https://www.taxresearch.org.uk/Blog/2023/07/13/theres-got-to-be-a-better-economic-song-to-sing/

  • @ Peter Martin,

    Thank your for your agreeable comment which I largely disagree with.

    I wasn’t really touching on the order of events in terms of spending and taxes that subsequent comments have gone into. Even the idea that taxation has to follow spending eventually seems a bit hard for some of the “radical” “new” and “bold” lot.

    And as for Marx’s Labour Theory of Value, I’m with Popper on that. But I suspect you were just prodding.

    My point is that what you allude to as the mystery of where money comes from in the first place isn’t going to provide the solution to all our problems that one might expect, when we find the source of free money; because there is some logical equivalence between free money and free labour, the latter being something those of us who need to earn a living are rightly wary of.

  • Money serves the function of a unit of measurement and medium of exchange in an economy.
    In a planned economy the aim is to increase productivity by getting information on production and deciding the distribution and pricing. The government has the authority and power to fix and regulate the market transactions. Economists point out that planned economies fail in deciding the consumer preference, surplus, and shortages in the market.
    The opposite of a planned economy is the market economy. Decisions on production, investment, and distribution are are taken according to market forces – supply and demand. Price discovery is the principal mechanism by which market economies match supply and demand i.e. market economies decide about investments and production inputs through market negotiation.
    Most countries (including the UK) have adopted a mix of centrally planned and mixed economies.
    Increasing or decreasing money supply does not change these fundamentals, but can impact the supply and demand for goods and services if credit creation becomes excessive or is overly restricted. In a planned economy, government instructs its central bank to create whatever level of money it thinks is required to facilitate the exchange of goods and services without generating inflation. In a market economy, the supply and demand for money is met via the commercial banking system.
    Government decisions on investment and spending are not determined by money supply or creation. The balance between day to day spending, long-term investment, taxation and borrowing (fiscal policy) are influenced by financial and market stability considerations (monetary policy).
    Political choices on the distribution of resources do not change the fundamentals of economic theory. They do change who gets to enjoy the benefit of those resources.

  • ALTER will be running a fringe at Bournemouth on the theme of “The Role of Land Value Capture in the reconstruction of Ukraine”
    The Labour Land Campaign similarly have called for the introduction of a land value tax (LVT) to redistribute the ownership of land across the country Activists call for land value tax to redistribute ownership
    The campaign wants to see unearned land wealth taxed to tackle wealth inequality, solve the housing crisis, to make homes affordable and fund public services.
    A key part of this campaign is a levy on the value of land without regard to any developments on that land.
    North of Tyne Mayor Jamie Driscoll recalled the campaigns of the Levellers and Diggers 400 years ago.
    “After all this time we are still talking about the fair distribution of land,” he said.
    “We must give the people clear examples of how a land value tax will impact them with rock-hard facts and pick a lane and stick to it.”
    West Scotland Labour MSP Katy Clark told activists that the power to make progress on land reform is devolved in Scotland and all the main parties included a commitment to a land value tax in their platforms.
    She said: “The problem isn’t a technical one about what this would look like.
    “It’s an unwillingness to take on vested interests. Partly because it could lead to more redistribution of wealth.”

  • Peter Martin 22nd Jul '23 - 8:56am

    “But let’s not bastardise MME. It really doesn’t imply increased marginal utility for extra spending.”

    This is true at the present time.

    The big problem with MMT is that it can easily be taken the wrong way. This is both by opponents on the right who are highly suspicious of what they perceive to be government meddling with the ‘money supply’ and also by supporters on the left who take it to mean much more than it does mean.

    The consensus of opinion amongst MMT economists is that there will soon need to be extra spending in the UK to prevent a collapse in social services including the NHS. There’s particular criticism of Keir Starmer who should also be outlining a plan to reduce the purchasing power of the non-government sector over time to balance total spending with available resources. He is falsely claiming that a responsible Labour administration will not require both higher taxes and higher spending by government.

    To put it in MMT terms: Higher taxes will be required not to fund the extra spending but to create the fiscal space for it.

  • Peter Martin 22nd Jul '23 - 9:42am

    @ Martin,

    “I have the impression that MME only really applies to comparatively hermetic systems and that the less dominant a currency is the more inapplicable the theory is. I would be interested from someone is not a Modern Monetary Economics proselytiser if this is a fair inference.”

    I’m not sure if I count as a “proselytiser” but as I’m at least partially agreeing with you I hope you’ll accept my tuppence-worth on the point.

    I would say the theory is equally applicable to all economies in all countries which issue their own currency but it does have different implications for countries according to their size and level of international trade.

    A key MMT requirement is for the currency to float, or vary in value relative to other currencies, so that an economy can adjust to changing circumstances in the world economy. The smaller the economy and the higher the levels of international trade, the more problematic that abrupt changes in exchange rates may be.

  • I am not an MME promoter, but I do want it to be considered. And no, it applies to any economy that issues its own currency. I only ask that people consider that the current economic orthodoxy may be wrong and can prevent us from doing what is necessary

  • The author is right to call for a radical Liberal approach to economics, but it must be about much more than MMT.

    One of the Right’s defining achievements in the 20th Century has been to sell a fantasy version of economics, eg that, if left alone, markets are self-regulating. Hence the antipathy to regulation (see Grenfell, Tower Thames Water etc ad nauseam for how well this works). This diverts attention from how, by whom and for whose benefit markets are really regulated (answer: behind the scenes, by the powerful to further their own interests).

    Other issues are equally distorted, so mainstream economics is overall about as real as the Ptolemaic view of the Solar System which, BTW, works reasonably well if all you have is pre-modern instrumentation. Better instruments and theory together expose its gross flaws.

    Similarly, if you accept is premises and ignore its theoretical and observational flaws, mainstream economics will eventually lead you to Tory conclusions – which is, of course, its purpose. So, LibDems, who by and large (to channel Alistair Campbell), “don’t do” economics can’t really oppose the Conservatives as we saw in Coalition.

    We need the ECONOMIC equivalent of the Copernican Revolution. The good news is that pretty much all the groundwork has been done by dissident economists. All it needs is a political home.

  • Peter Hirst 22nd Jul '23 - 2:14pm

    Isn’t economics about how the economy functions, not what you do with what is raised by it? Unfortunately no-one seems to understand how the economy functions, it is because of those strange humans who do not behave rationally. So economics has become how you spend the money and how it is raised i.e. it has become politicised. We need a new word to distinguish the two.

  • Peter Hirst,

    there is a distinction to be made between political economy and economics as a social science that focuses on how economic agents respond to changes in economic conditions.
    It is true too say that any given economy is something of a blackbox where you can see what the outcomes of changes in inputs are but can’t consistently model the mechanics of changes when dealing with so many variables and inconsistent behavioural aspects. There remains little consensus on the merging of micro and macroeconomics into a single foundational theory.

  • Peter Hirst 22nd Jul '23 - 3:52pm

    Thanks Joe, I was thinking of econpolitics but political economy is fine. Moving from descriptive to predictive seems economics’ challenge.

  • Peter Martin 22nd Jul '23 - 4:16pm

    ” Unfortunately no-one seems to understand how the economy functions, it is because of those strange humans who do not behave rationally”

    So you’re saying that we have a functional economic system, even though it could function better, but no-one understands how it works? This doesn’t seem very likely. I’m never quite sure, though, if many of our politicians really don’t understand it or say things which are quite incorrect because they don’t want us to understand it.

    I suspect it’s a bit of both. For example, when the Govt was announcing its support for the economy in 2020 in the early stages of the Covid lockdown we heard some of them, and in the Lib Dems and Labour too, asking, with what sounded like genuine sincerity, where the money was going to come from? Didn’t they know?

    Someone must have done because those support payments did appear in our bank accounts!

  • Christopher Haigh 24th Jul '23 - 11:43am

    I’m sure I remember reading when studying economics (50 years ago !) that in Germany under Bismarck and the Prussian Kaiser all public expenditure was funded by printing new money. If goods were in ample supply this would have facilitated trade by putting more money into the economy. If goods were in short supply however the extra money would have led to demand pull inflation in the UK at the moment Brexit and the war in Ukraine has given us cost push inflation due to our reliance on imports which have gone up in price. I think Sunak and Starmer have got it right that creating more money in the economy at the moment would create a further cycle of demand pull inflation due to the cost constraints in the supply of goods.

  • Peter Martin 25th Jul '23 - 9:58am

    @ Christopher Haigh,

    There’s some difference between supply push inflation and demand pull. For example in an ultra simple economy where potatoes are priced at 1 unit per kg and we have 100 buyers with 1 unit each to spend they will be able to buy 1kg each if there are 100kg available to buy. Increase their nominal spending power by 1% or reduce the supply by 1% and the price of potatoes is going to rise by almost similar amounts. The end result is slightly different however in that if there is a supply problem everyone will end up with slightly less to eat.

    Of course we don’t have anything like this ultra simple economy. If there is a shortage of anything which may even be only at slightly lower levels than usual the rationing effect of price is disproportionately felt by those at the lower end of the income scale. The wealthy have carried on using just as much gas in the last year or so as they have always used whereas the poor have had to choose between paying for food or heating.

    There is still enough food and energy available for all if it was only shared out a little more equitably.

  • Economic policy has to support the values of the party as set out in the seven core values: liberty, equality, democracy, community, human rights, internationalism, and environmentalism. Each of these underpin the party’s specific policy proposals https://www.libdems.org.uk/values
    Social liberalism or Social democracy is supportive of a strong state that protects the right to property and enforces contracts and also supports government interventions to resolve market failures. Social liberalism includes a broad role for the state but does not seek to replace private enterprise and the free market with public enterprise and economic planning. A social market economy is a largely free-market economy based on a free price system and private property that is supportive of government activity to promote competition in markets and social welfare programs to address social inequalities that result from market outcomes.
    The greatest cause of inequality today is the housing market. The proportion of households occupied by the owners of the property in England generally decreased since 2000 , from a share of 70.6 percent of households in 2000 to a share of 64.3 percent of households in 2022 and continues to decline with dwindling prospects of ever being able to buy a home for over a third of the population.

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