19. Who will pay for the Covid bailout?

The argument about how the Covid-19 bailout will be paid for and by who is already beginning to rage. In his last act as the UK’s Shadow Chancellor for example, John McDonnell laid out plans to build ‘a new kind of Britain’ after the virus.

“We pay for it by introducing an immediate windfall tax on the banks and finance sector that we bailed out when they brought about the crisis more than a decade ago. Combining this with a wealth tax on the richest within our society and a tax on multinationals, we can demonstrate — just as the current government has demonstrated — that when we need the resources, they can always be found.”

This is nonsense. It is simply not true that when ‘we need the resources, they can always be found’. Money is not a ‘resource’. It is an abstract symbol with no intrinsic value at all. Yes, it’s true that money can always be found because banks and governments can conjure it into existence from nowhere via mechanisms such as extending credit (promises to pay in the future) and ‘quantitative easing’ (printing money).

But resources cannot ‘always be found’. Their availability is constrained by real world production capabilities and capacity, as recent shortages of ventilators, testing kits and protective clothing testify. And it is the deployment of these real resources — not money — that ‘pays for’ the things we depend on in our daily lives. They are ‘paid for’ by the work, raw materials and other real world resources that go into making them available.

This is important because it strikes at the heart of how we respond to the massive economic challenge presented by the virus.

We’ve been here before

Thankfully, we have a chance to learn from a previous debate that raged amidst an even worse crisis than this: the second world war.

By spring 1942, the allies were beginning to think they might be able to win the war after all. The Soviet Union had repulsed the Nazis and was know on the offensive. American troops had started piling into Europe. Attention now began to turn to how to rebuild once hostilities ended.

John Maynard Keynes wanted an ambitious building programme to build homes, libraries, theatres, concert halls and dance halls to “add in every substantial city the dignity of an ancient university or a European capital”. But he was meeting strong resistance from the establishment who said we couldn’t do do this because we didn’t have the money.

Keynes’ replied to a figure called ‘Sir John’ in a BBC lecture in April 1942:

“The money?”, I said. “But surely, Sir John, you don’t build houses with money? Do you mean that there won’t be enough bricks and mortar and steel and cement?”

“Oh no,” he replied, “of course there will be plenty of all that”.

“Do you mean,” I went on, “that there won’t be enough labour? For what will the builders be doing if they are not building houses?”

“Oh no,” he replied, “of course there will be plenty of all that”.

“Well,” I said “if there are bricks and mortar and steel and concrete and labour and architects, why not assemble all this good material in houses?”

Keynes finished by saying “anything we can actually do we can afford”. I’ll say that again because it is so so important:

“Anything we can actually do we can afford.”

By presenting the question this way (rather than today’s assumption that “we can only do what we can afford” in purely financial terms) he sliced through the swirling confusion generated by the money mirage to focus on the requirements of real wealth creation: assembling the bricks, mortar, steel, concrete, labour and architects — the skill, know how, raw materials, equipment — to make the things people need and want.

Mind forged manacles

Confusing money with resources and fixating on the redistribution of symbolic financial wealth, as McDonnell does, simply perpetuates the focus on faux ‘affordability’ rather than do-ability. In doing so, it hands intellectual and practical power to those who hold the purse-strings.

If we redistributed financial wealth tomorrow so that everyone had exactly the same amount of money it would do nothing — repeat, nothing — to change the realities on the ground in terms of what goods and services we are capable of producing. How big or small a pile of symbols in a ledger happens to be has nothing to do with the availability of people to work, materials to work on, and equipment to do the work with.

In the wake of the virus, thousands of firms face bankruptcy and millions face under-employment of unemployment. If this happens, it’s not because there is no work to do and no people or resources to do it. It will happen because we have been bamboozled by the money mirage-based claim that, ‘we haven’t got the money to pay for it’.

Keynes nailed it back then when he said “In the enforced idleness of millions, enough potential wealth is turning to waste to work wonders. Many million pound’s worth of goods could be produced each day by the workers and the plants that stand idle — and the workers would be the happier and the better for it.”

To cope with the crisis we have to recognise that Keynes was right when he said we can afford what we can actually do. We need to focus all our attention on the means and mechanisms of doing that doing. On this McDonnell is right. A society run on that basis would look very very different to the one we have now: different institutions, different norms and values, different measures of value. That’s not easy to get right. But it is the challenge we now face.

— — — —

P.S. I’m all for a more equal society and doing something radical about financial cancer in the City. But the Labour Party’s approach to achieving them has lacked credibility for two reasons.

First, in today’s post-industrial financial cancer-ridden economy, ‘redistribution’ isn’t enough. With the most of the factories, steelyards, shipyards, mines and so on gone, the country’s underlying productive capabilities and capacities are in decline. You can’t redistribute wealth that hasn’t been created.

Second, as this blog points out, focusing on the redistribution of financial wealth simply perpetuates the mind-forged manacle that it’s all about what we can ‘afford’ in terms of symbolic pluses and minuses rather than what we can do. Fixating on the redistribution of symbolic financial wealth rather than distributed-by-design real world wealth creation is not a solution. It’s part of the problem.

Bibliography

• The quote above is from an address Keynes made on the BBC and published in The Listener, 2 April 1942. I can’t find the full text online, but it can be found in his Collected Works XXVII, How much does finance matter? p264.
• Karl Polyani, The Livelihood of Man, Academic Press, New York, 1977. In this book he distinguishes between two meanings of the word ‘economic’. “The substantive meaning stems from man’s patent dependence for his livelihood upon nature and his fellows. He survives by virtue of an institutionalised interaction between himself and his natural surroundings.” What we can do, in other words. The second, formal, meaning is all about money prices, profits, and profit maximisation. The money mirage focus on whether ‘we have enough money to pay for it’.

The other quote can be found here.

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