The household fallacy

It’s election time and the household fallacy is back in vogue.

On Radio 4s “Any Questions” this week a lady asked (more eloquently then my version, go to 14.45 minutes in), how are we supposed to teach our children about counting their pennies when politicians are promising to spend on this, that, and t’other? The answers given by the panellists were uniformly disappointing. Here’s what I might have said.

We need to teach our children and everyone else, including politicians, that goverment spending and our spending do not work in the same way.

When the goverment spends, that spending is someones income and that someone pays some tax so the government immediately gets some of their money back. And then that someone spends most of their money which becomes other peoples income. And these other people also pay tax, so the government gets another fraction back. And these other people also spend which becomes the income of even more people who also give a fraction back to the goverment. And so on. If everyone spends then the government gets all its money back. Whereas when you or I spend we do not get anything back. That is a big difference. The only way the goverment can be in deficit is if the people decide to save. The goverment debt is simply the peoples savings. If at any point the people go out and spend their savings, then the goverment debt will be cleared.

Now if that all seems too difficult, and I am allowed a bit more time, lets try to think about things another way.

Imagine your household were like a country. In your household there are people that can provide everything you need. There is a lady who builds windmills that provide power, there is man that looks after the pigs, there is someone who grows vegetables and a wise person who teaches the children. In this utopian self-sufficient household there is no need for money. Everything you need is provided by the labour of the occupants. Everything works fine until someone decides to spend their days drinking beer rather than working. To prevent this, the elders introduce a system of credit based on post-it notes. The credit notes record how much work each person contributes and can be exchanged for beer, wooden toys or whatever they desire (you can try this at home, if someone does the dishes they get a post-it note which can be exchanged for chocolate or saved for a future purchase). When the elders need someone to mend the roof they reward them with post-it notes (of which they have an unlimited supply). But as the number of notes in circulation gradually increases, the makers of wooden toys realise that they can demand double and buy more beer, but then the brewers want more notes for each beer and people start to get upset. To stop this runaway inflation the elders need to prevent the quantity of credit notes growing faster than the amount of work getting done which they do by taking back a fraction of the notes each time they are exchanged. This we call tax.

The elders, via issuing credit, have enormous power to decide what gets done. Whether the roof gets mended or not, or whether we need another windmill. For this reason the other members of the household need some way of replacing them if they misuse their power. And lo, the household invents representative democracy!

Is this too hard for children (and politicians) to understand?

There is one good question a child might ask. “Why can’t I create my own post-it notes like the elders do? Then I can buy everything I want without working.” The answer is. “Well you could, but others will not accept your notes. They have no value. The value of credit comes from the work that is done or promised to be done in exchange. That is why the elders have to be careful to only create credit on the promise of work and if they get that right everyone prospers.”

Comments

  1. Andrew (Andy) Crow -

    “Is this too hard for children (and politicians) to understand?”

    I think children might get it, but politicians don’t seem to. 🙁

  2. Pingback: The UK government is not like a household – and does not have a household type budget. That’s because it, quite literally, makes the money the rest of us use. So let’s stop pretending it has a credit card
  3. Pingback: The UK government is not like a household – and does not have a household type budget. That’s because it, quite literally, makes the money the rest of us use. So let’s stop pretending it has a credit card – The B-Trader
  4. Richard Bond -

    I didn’t listen to the programme, so have no idea of the quality of the replies. Your short version is excellent and the longer one very good, but in a debate situation it is rarely about what is right or reasonable (or even accurate), it is about winning and point scoring.

    A Tory response to your longer explanation would ignore the lesson and focus on the workshy beer drinker and then we’re back to not being able to afford social security and we’re back to austerity. Whether they actually believe it or not is immaterial. The household analogy is a stick to beat Labour with.

    It also puts Labour permanently on the defensive, They really need something like your story, but preferably without the workshy drinker. Is there a way to recast the story without that hook?

    (LibDems I don’t know about. They’ve previously supported austerity and are now calling for OBR to look at party manifesto costings, so would probably still be backing austerity.)

    1. Charles Adams -

      Good point. It is not necessary.

      Instead we can just say that to ensure fairness the elders introduced a system of post-it notes to credit the work done by individuals which they could use in exchange for goods.

      The self-contained household with its unlimited supply of post-it notes is the analogue of a sovereign currency country.

  5. Alan M -

    As a work-shy beer-drinking student (about 50 years ago!) I used to have the ‘luxury’ of signing on the social during the hol’s. In those days students used to get a pile of post-it notes which allowed them to drink several pints of beer a night (and buy a packet of fags!).

    These post it notes – because of the levels of excise duty/’tax back’ – went more or less unmolested straight back to the issuer whilst ensuring that brewers, draymen, landlords and their staff all made a living and that the High Street was a thriving, vibrant place.

    Mrs Thatcher stopped issuing those particular post-it notes. The ‘three bar’ pub and hotel where I used to send them has long-since closed and, after years of neglect and dereliction, was bought by a property developer who converted it into flats. The brewery closed too…and all the people involved in that chain lost their jobs and had to ask for post-it notes so that they could pay rent and eat. And students now sit at home in those flats and use their post-it notes to pay rent to the developer (who keeps them in a box in the Turks and Caicos)…Discuss!

    1. Charles Adams -

      Indeed. Still into the 80’s we paid students to be students. They still do in Denmark.

    2. Peter May -

      Work-shy beer-drinking students of the world unite! Now this does challenge the handbag economics narrative of the government as a household!

  6. MigT -

    Great article!

    Here’s what would have happened if Prof. Adams had been on the AQ panel : The Tory would have shouted about something else until the subject got changed. It’s happened a few times lately, e.g. a couple of weeks ago when Jeanette Winterson challenged the household fallacy.

    Labour MPs still don’t challenge it publicly (which is almost certainly policy), but word is spreading and the Tories are rattled 🙂

  7. David Carty -

    Another reason no one would accept the child’s post-it notes is that they are forced (presumably under the threat of having sanctions applied) to continue using the elder’s post-it notes in order to pay tax using those same post-it notes. If the child could somehow enforce their own tax-non-payment sanction then people would begin accepting the child’s post-it notes and they would begin to acquire value.

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