Economics 101

One of the core aims of  Progressive Pulse is to increase economic literacy and in particular macroeconomic literacy. To help in this you may have noticed that some posts are being labelled “Economics 101”. you simply need to click on the “Economics 101” tag at the top left of this post (under my mugshot and date) to get the full list of posts. Eventually the hope is to put an Economics 101 tag on the main menu.

Many years ago I was very interested in economics and an avid reader of for example books by John Kenneth Galbraith and thought Keynesian economics made very good sense.

Around the time I was finishing my PhD however neoliberalism somehow took over. I was in the US at the time at the Harvard Smithsonian Centre for Astrophysics, desperately hoping Ronald Regan would not get elected. He seemed to me at least a complete fraud and would put corporations ahead of people. I gave “Trickle down Economics” for example almost zero chance of working. Sadly Regan got elected as president  and indeed Thatcher became PM in the UK. Between them they brought about a neoliberal revolution. Countries are like supertankers and I can’t help but worry that the rudder has been trimmed incorrectly over much of the last 40 years in both the US and UK.   Indeed I pretty much lost interest in neoliberal economics  and economics in general as it felt somehow repellent.

Thatcher and others however have been very adept at pushing for example the “household model” which is completely inappropriate for a macro economy.  Indeed the level of economic literacy (and in particular macroeconomic literacy) seems to have decreased rather than increased over the past 40 years. Someone of a suspicious mind would be forgiven for thinking this “dumbing down” was deliberate.

If the economy were doing well possibly the specific economic theory in use would not matter so much. Since 2008 however the UK economy has been growing very slowly (growth rate is the neoliberal benchmark)  well below its 3%  trend. It would be interesting to calculate that if you removed the effect of immigration (a very strong positive) and the top 1%, whether there has been any growth at all.

Thomas  Clark of the blogspot Another Angry Voice identifies ten questions to put to the general public:

  1. What is a fiat currency?
  2. How is money created?
  3. What is the difference between a debt and a deficit?
  4. What is the difference between fiscal and monetary policy?
  5. What are capital controls?
  6. What is a transfer pricing strategy?
  7. What does fiscal multiplication mean?
  8. What is a derivative?
  9. What is a “naked” trade?
  10. What is Quantitative Easing?

He is of the opinion that less than 5% of the UK population could answer four of these with any depth of knowledge, let alone all ten of them. Sadly I can’t say he is wrong.

I’m not sure I fully understand Quantitative Easing for example. There seems to be a bit too much “smoke and mirrors”.

How many of these do you understand fully?  Are the other questions which are equally or more important?

We intend to answer these and other questions over the next few months. Indeed some of these have been already addressed but possibly it is worth addressing these questions directly?

 

 

Comments

  1. Noel Scoper -

    Indeed, even the great Richard Murphy struggles with QE.

  2. Grace Sutherland -

    I don’t understand any of them fully. I regret to say I’m not even sure I understand them partially. I am though, interested in knowing more. I think 101 Is a great idea and I hope you’ll be open to naive questions.

    1. Sean Danaher -

      Hi Grace
      thanks for your honesty. I by no means have a great understand either. Life is a process of constant learning I think and often naive questions are the most penetrating.

  3. Peter May -

    I think we can safely assume that if the answer is too complicated it is probably wrong. Most specialists like jargon to keep the opposition away and increase their own prestige. So some of these questions are jargon – that doesn’t stop them being relevant and widely referred to in the media. But it doesn’t stop them being jargon either.
    I propose to try to start putting a jargon buster section together A-Z. (Not unlike an earlier attempt in a different area:
    http://www.winedrop.co.uk/grape-varieties.asp)

    1. Sean Danaher -

      Sounds like an excellent idea. They have a pretty sophisticated one at Skeptical Science https://skepticalscience.com/ it is an Australian site despite using American English spelling. Possibly Sceptical Neoliberal Economics might be a good idea!

    2. Grace Sutherland -

      Ah….Arneis, Barbera, Barolo, Barbaresco, Favorite, Dolcetto Superiore Dogliano, Alba Rosso. I would love to be in Piedmont right now but G electioneering is coming between me and my ancient hilltop village in the heart of Dolcetto country.
      Jargon busting is very welcome.

  4. Ms Christine Bergin -

    Splendid idea. Even the experts can learn from being made to explain things. Though I have learned an enormous amount from Mr Murphy, finding out how to make thie subject comprehensible to others is a skill I want to learn.

    1. Grace Sutherland -

      I hear you Christine. Please hone your skills on me. I’m a willing student.

  5. PJ -

    I reckon I could answer all of them reasonably well but I’m probably not an average member of the public. I’m a scientist with an MBA and a large bookshelf on the financial crash. I don’t think the public needs to know all this stuff, but regulators and politicians ought to. What we have seen in the last 30 years is more the influence of dark money than solely public ignorance. What is paradoxical is that Internet which should have empowered people to access information has instead been subverted by lies.

    The maxim “When a man’s income depends upon his not understanding something, you can count on his not understanding” (Upton Sinclair) explains a lot, and I could adapt to “When a man’s income depends on others not understanding something, you can count on his dissimulation”. The answer isn’t simply more macroeconomic education, it’s education in basic critical thinking.

    Which is not to say more macroeconomic understanding is a waste of time. Far from it.

    1. Sean Danaher -

      Hi PJ
      you make many good points. Journalists also are a problem as they need to know enough to ask the right questions. Also politicians should lead not follow. The “will of the people” leads too easily to populism and neo-fascism also to wrong decisions such as Brexit.

  6. Grace Sutherland -

    Hi PJ
    You say,
    “I don’t think the public needs to know all this stuff, but regulators and politicians ought to.”
    We may not need to know but more and more of us want know. If the public knew more they’d be able to tackle the MPS who don’t know as much as they think they do, and there are plenty of them. They’d also be in a better position to critically question the ‘information that has been subverted by lies’. I am one of the public who has awakened in the last 4/5 years or so, precisely because I have seen the cumulative effects of 40 years or so of dumbing down by the British press, one of the major results being Brexit. If we’d had a responsible press dedicated to truth and with a desire to inform rather than an obsession with scandal and scare stories, Brexit would never have happened. It is little wonder people are trying to educate themselves.
    I live not far from Ullapool in the Highlands where the editor of the Daily Mail has a 17,000 acre estate. He has repeatedly sucked subsidies from the EU, whilst bad mouthing it at every opportunity in his newspaper. There are estates like that all over Scotland owned by members of the British establishment. Is it any wonder they are petrified about Scottish independence and will resort to any kind of lie and chicanery to put us down? Where would a new land tax leave them, for example?

    1. Charles Adams -

      I agree – the people really need to understand how money works. There is one thing that puzzles me and it was a concern to others before me, if people understand money does it actually become something different? I will try to address this in a post some day.

  7. Simon Cohen -

    ‘There are estates like that all over Scotland owned by members of the British establishment. ‘

    Karl Marx knew about that and wrote about it in Volume 1 of ‘Capital.’ There is a whole section on the Highland Clearances.

    1. Grace Sutherland -

      Chapter 27 if I’m not mistaken Simon.
      When I was in teaching in the eighties and nineties, The Clearances were a regular part of our environmental studies programme in Highland schools. At last our kids were hearing something about their own history instead of the standard establishment version of Robert the Bruce, The Romans and King Canute! I even brought in Scots historian Professor Jim Hunter who ran the Crofters federation to talk to the kids about it. No idea what they do now.I dread to think how overcrowded the curriculum has become in the interim.

  8. Simon Cohen -

    research by Positive Money showed that 90% of M.P have absolutely no idea about money creation and the monetary system. A deeply shocking and worrying fact. Because of this we get ludicrous statement of profound ignorance from leading politicians that the public cannot challenge because the journalists don’t have the knowledge themselves to explain it. For example, the following nonsense:

    1) may telling Corbyn that he will ‘bankrupt’ the country. May has a PPE from Oxford yet she makes a statement that betrays ignorance of the monetary system or worse, outright deceit. I’ll grant her ignorance on this one. Had M.P’s been better informed they could have challenged this yet it went out unchallenged.

    2) Cameron: ‘We’ve maxed out on our credit card.’ Another case of someone blatantly displaying total and utter ignorance of Government fiscal procedure and drawing a false analogy between Government that is a currency issuer and a credit card holder. A person saying such a thing should not really be an M.P. never mind Prime Minister.

    3) Osborne pretending a ‘surplus’ was possible within a few years. Incredible lack of comprehension of how money circulates and Government spends and how the different sectors balance out (explained by Charles Adams in a recent blog). Yet this man was chancellor. If he had succeeded in his proposal, the economy would have been reduced to a dust-bowl through lack of money.

    4) May talking about reaching a surplus by 2025. Yet more blatant nonsense. Whether there is a deficit or surplus depends on so many other factors that to utter such nonsense is treating the public like fools.

    5) Labour talking about paying down the deficit. No need to even do that unless the other sectors (household and external) require it. At least Labour recognise Keynes’s insight that ‘spending creates income.’ A BIG advance on the Tories!

    6) Andrew Neil (who regards himself as knowledgeable) asking inane questions about the Government not getting the surplus it spoke of without realising why that was not possible and not desirable.

    Like many others, I had to educate myself on many of these issues and am still involved in this process. It’s not easy, one has to often piece together the bits of information like a private detective often finding that one has reached conclusions that have to be jettisoned and go back to the drawing board many times before a reliable picture can be built up. One relies on the good fortune of finding the right websites (in my case Richard Murphy and Bill Williams) and reading the right books that explain things accurately rather than leaving one swimming in a sea of cloudy concepts.

    There is a great need for more education from school age onward. Neo-liberalism doesn’t like an informed public. One of the first victims of the Thatcher age was the destruction of adult education facilities simultaneous to the dumbing-down of the press via Murdochisation. We need, as a society, to reverse this.

  9. Charles Adams -

    I agree. Did you mean Bill Mitchell – rather than Williams? Also May did Geography at Oxford.

    1. Simon Cohen -

      Yes-Bill Mitchell. So May did Geography? Well, that offers at least a vague excuse!

      That our politicians have no knowledge of the operations of the monetary system should be deeply disturbing but I think this has been the case for many years. Healey admitted after the IMF loan in 1976 that they didn’t really need it!

      1. Grace Sutherland -

        I have to agree Simon. One would think it a pre requisite for a potential MP to have a very lively interest in, and at least some background in the monetary system, albeit theoretical. One might feel quite qualified to stand as an MP for a whole raft of (good) reasons, but without this essential understanding of the origins of, and the workings of money, MPs are working in the dark and open to all kinds of manipulation and deception by those who do. I honestly think it’s of immense importance that ordinary people know how money operates too. So many good people have an instinct for what makes a healthy society. So many have a desire for a fairer society but feel shafted by the guardians of the money/power gate. It is never real education that causes problems, only being kept in the dark.
        Charles Adams says “There is one thing that puzzles me and it was a concern to others before me, if people understand money does it actually become something different?” Yes, it will probably become something different Charles. I am very interested in hearing your ideas about how and why it might.
        I have to agree with Simon too. There is a huge need for a comprehensive education about money from pre-school onwards. I wonder which political party will have the courage to set it in motion? Ahem…. Richard … Whadya think?

      2. Peter May -

        I agree. I think we have to mandate education not just to include the 3 Rs but also to include where money comes from (though probably only for a generation) diet and how to cook. Of course other subjects are important but they can probably rely on interest rather than the classroom. (Think what cooking can teach about physics and chemistry for example -and here’s a secret I’ve never admitted before. Maggie, as a Chemistry graduate, taught me on the telly that cooking was about chemical change. Nobody else taught me that!)

      3. Charles Adams -

        Grace: I will at some point post a longer piece on understanding fiat money.

        Fiat money is a belief system and economics is the modern priesthood. Paul Samuelson (considered one of the most influential economists of the later half of the twentieth century) once said:

        “one of the functions of old-fashioned religion was to scare people by what might be regarded as myths into behaving in a way that long-run civilised life requires.”

        And so it is with money – myths are thought necessary to ensure long-run stability.

        Imagine that in fiat money world, there are two almost identical states called Agnotology and Ontology. In Agnotology, no one – except the high priest – believes in the magic money tree, whereas in Ontology everyone knows that the magic money tree exists.

        Agnotology is like gold standard world and the high priest is very happy. While over in Ontology, the priest worries that the citizens will take too much fruit from the tree. The question is which state will be more successful?

  10. Michael Christian -

    There’s an excellent book by R. Murphy –Lessons for the Young Economist
    – for those who don’t know where to start…

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