17 October 2017

The magic money tree won’t save the NHS


Here we go again. People are talking about giving the Magic Money Tree a shake and spending the harvest. The Government, they say, can just print as much money as it likes and go spend it. They’re right of course. It can be done. It has been done – but the results are usually pretty awful, as Henry VIII among others proved.

Or as Douglas Adams put it, in The Restaurant at the End of the Universe:

“ ‘Thank you. Since we decided a few weeks ago to adopt the leaf as legal tender, we have, of course, all become immensely rich.’

Ford stared in disbelief at the crowd who were murmuring appreciatively at this and greedily fingering the wads of leaves with which their track suits were stuffed.

‘But we have also,’ continued the management consultant, ‘run into a small inflation problem on account of the high level of leaf availability, which means that, I gather, the current going rate has something like three deciduous forests buying one ship’s peanut.'”

A current expression of the same idea is Modern Monetary Theory. Government can, in this day and age of fiat currencies, simply print more money and go and spend it. And if the subsequent inflation becomes a bit too much, then taxes can rise to curb that. So we end up with a high-tax and high-spend economy, just as if Old Labour were still in charge. So much for the new economics.

There is however one rather large error underpinning both of these ideas. One usefully exemplified here, where a doctor and a physicist tell us that MMT means we can have as much of the National Health Service that we wish. For money is no object: there’s simply no shortage of it.

As an aside here, the advice of Joe Kennedy comes to mind. When the shoe shine boy is giving stock tips, maybe it’s time to get out of the market (Joe did, sold just before the Great Crash and saved the family fortune). When the non-economists are telling us about core economic theory it is time to be wary.

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.

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.

In order to have more medical care from our scarce resources, we must have less of other things. Less because those things we were devoting to making something else are now being directed to delivering more health care.

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.

So the Magic Money Tree and folk versions of Modern Monetary Theory fail. The limitations to the things we can buy ourselves are not about the quantity of money, they’re about the resources we have available to meet our desires, nothing else.

Economics is about the allocation of scarce resources. This doesn’t change even if money’s not scarce. 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.

Another way of putting it is that both the Magic Money Tree and Modern Monetary Theory are useless as actual economic theories. For they don’t change our reality at all. We can’t have everything, so we’ve got to choose what it is we really want.

Tim Worstall is Senior Fellow at the Adam Smith Institute