Sunday, 6 May 2018
Richard Murphy’s pathetic criticisms of Positive Money.
The criticisms I’m referring to are in an article of his entitled “Why Positive Money is Wrong”, published today (6th May 2018).
First, congratulations to Murphy for at least having a reasonable grasp of PM’s ideas. However, that’s where the congratulations cease.
The first weakness in Murphy’s criticisms is that it’s not just PM that advocates a PM type system. The New Economics Foundation also backs the same system. Plus Ben Bernanke made approving noises about that sort of system.
Second, it’s a bit of a joke for Murphy to write about banks and money given that there’s a glaring self-contradiction in his own writings on the subject: to be exact, he claims here that commercial banks create the bulk of money in circulation. While in contrast here, he claims the opposite, namely that they don’t!!
Anyway, Murphy’s first criticism of Positive Money is that under a PM system, stimulus is effected by having an independent committee of economists decide how much base money to create and spend into the economy (which is done via extra public spending or via tax cuts depending on the wishes of democratically elected politicians). However, he objects to an “…unelected committee taking control of our economic policy”.
Well the first answer to that point is that the latter committee does not “take control” of all aspects of “economic policy”: it is limited simply to deciding how much base money to create, as I explained just above.
Moreover, as Murphy himself rightly says, the undemocratic nature of the above committee is no different to the undemocratic nature of the EXISTING method of imparting stimulus. That is, while the “democratically elected” finance minister under the existing system can implement a budget deficit, the central bank has the right to overrule the stimulatory effect of that deficit by using interest rate rises if it sees fit.
Thus Murphy’s complaint about lack of democracy is NOT a specific characteristic of PM’s proposals. I.e. PM is merely advocating a slightly different (but still undemocratic) method of implementing stimulus. I.e. both the existing system and PM’s are undemocratic in that the SIZE of (but not the nature of) a stimulus package is determined by unelected economists.
As to whether it is a good idea for “democratically elected politicians” to have a say in the size of the deficit, it is precisely the fact of politicians having that right that has led to a total and utter shambles in the US, with various other countries being scarcely less shambolic.
To be exact, prior to Trump’s election, Republicans were screaming about the dangers of the allegedly excessive deficit (as they always do when not in power). But that was during the recession when a large deficit was actually needed. Republican politicians thus helped prolong the recession.
Then Trump gets elected, and what happens? Republicans let the deficit go thru the roof, and to add insult to injury, just when a large deficit is not needed: i.e. just when it’ll do more harm than good.
In short, letting democratically elected politicians have a say in the size of a stimulus package is lunacy. In contrast, it is absolutely right, as Positive Money explains, for politicians to retain control of obviously POLITICAL decisions, like what percentage of GDP is allocated to public spending and how that is split between education, defence, etc.
Murphy’s second objection to Positive Money’s ideas is that he objects to “..inflation being at the core of money policy.”
Well the answer to that is very similar to my above answer to Murphy’s above first objection: Positive Money is simply continuing with the conventional wisdom here, namely that excessive inflation is undesirable. I.e. constraining demand when inflation is excessive is NOT, repeat NOT an idea which is peculiar to Positive Money. Moreover, if Murphy thinks inflation is not a potentially serious problem, perhaps he could let us now exactly how high he is prepared to let inflation go: 20%? 50%? Robert Mugabe %?
Put another way, if economists proved that demand should be related to the number of lies told by Tony Blair in the last month, I’ve no doubt Positive Money would be happy to go along with that.
What is money?
Murphy’s third objection starts as follows.
“Third, this policy fails to understand what money is. Money is, in the modern world, simply a promise to pay. It comes into existence when that promise is made. It ceases to exist when it is fulfilled. So, governments create money when they promise to pay when spending, and fulfill that promise when accepting the money that they create as payment for tax.”
Well the first problem there is that the definition of money given in economics text books and dictionaries of economics do not say anything about “promises to pay”. What they do all say is something along the lines of “Money is anything widely accepted in payment for goods and services or in settlement of a debt”. And money has taken a HUGE range of different forms in different societies over the millennia. For example on some desert islands, cowrie shells were accepted as money. But in what sense is a cowrie shell a “promise to pay”? Come to that, in what sense is a gold coin, e.g. the Sovereign gold coins used in Britain in the 1800s a “promise to pay”? Darned if I know.
But that’s not to say that money cannot take the form of a “promise to pay”. As already stated, money can take, and has taken a myriad of forms. And in fact money issued by commercial banks is a “promise to pay”: it’s a promise to pay base money: in fact your bank makes good on that promise whenever you withdraw physical cash from an ATM.
Is base money a “promise to pay”?
One the face of it, the answer might seem to be “yes”: after all, £10 notes say (alongside the signature of the chief cashier at the Bank of England) “I promise to pay the bearer on demand the sum of £10”. Only problem is that that promise is wholly empty: it could even be called “fraudulent”. Reason is that if you turn up at the BoE and demand £10 of gold or anything else in exchange for your £10 note, you’ll be told to shove off.
Worse still, the UK government which owns the BoE is entitled to grab any amount of money off you whenever it wants via tax, which makes that “promise to pay” look a bit silly. To illustrate, if I issue some promises to pay and they end up in the hands of Joe Bloggs, but at the same time I have the right to break into Bloggs’s house and grab the promises to pay and burn them or spend them, then those promises are a trifle empty, wouldn’t you say?
Limiting the supply of money.
Murphy’s fourth objection starts:
“Fourth, the PM proposal rations money. This is exactly what the gold standard did. It said money was in limited supply and countries were not at liberty to create it at will. The limitation in supply created a price for money - or interest - which rewarded those who had it and penalised those who had not in a form of rent extraction that reinforced inequality. We have been eliminating this rent: in my opinion this is the best explanation for the rapid decline in real interest rates and the reason why they will not increase again…”.
Well now there’s a glaring problem with that theory, namely that Britain came off the gold standard in 1931, but the big decline in interest rates occurred in the last twenty years: i.e. starting roughly in 1990!
Then in the next sentence, Murphy says in relation to the gold standard: “But, more important than this, the limitation on money availability constrained growth: desirable transactions could not take place because the means to make settlement was said not to exist.” Well that’s a valid criticism of the gold standard (at least during recessions). But the UK has not been on the gold standard for almost a century, so Murphy’s point there is irrelevant.
And as regards any “limitation on money availability” to the extent of causing a recession, i.e. less than full employment, obviously that “limitation” is undesirable. But it is easily dealt with under a Positive Money system by having the state create and spend more base money into the private sector! Problem solved!
Sterling would be undermined?
Murphy’s fifth criticism starts: “Fifth, PM would also hopelessly undermine the use of sterling. The reality is that people borrow and spend in sterling because they need to pay their taxes, and a banking system that can create credit to meet their needs lets them do so.”
Well there’s a glaring flaw in the claim that the commercial “banking system” enables people to pay taxes: it’s that the UK government will not accept commercial bank created money in payment of taxes! Other countries do likewise.
It is true that you can write a cheque drawn on a commercial bank like Barclays in payment of your taxes, but the UK government will not accept that cheque: what it does behind the scenes is to go along to Barclays and demand base money to the amount written on the cheque. In fact not even commercial banks accept each other’s “DIY money”: that is, at the end of each working day, commercial banks (and the UK government) settle up with each other using base money.
Hopefully I’ve demonstrated that Richard Murphy's criticisms of Positive Money are a joke, though credit where credit is due, he is clued up on some aspects of economics. He is an accountant by trade, and unsurprisingly knows a fair amount about tax.