20. Money is an instrument of power

A reader responds to my last blog with a question. In it, I highlight two different answers to the question “can we afford it?’.

One answer — “we can do what we can afford” — defines affordability solely in terms of availability of money, focusing all attention on plus or minus entries in bank accounts. The other answer — “we can afford what we can actually do” — defines affordability in terms of real world operational capabilities and capacity, focusing attention on what we can achieve with real people working on and with real resources.

So here’s the question:

“I don’t understand this. You are clearly making a strong argument and I accept this is not all about redistribution. But to argue that financial resources are not the issue must be wrong? What about some countries in Africa? They have tons of natural resources and almost unlimited labour but many remain pretty broken.

What am I not getting?”

The crucial point here is that for wealth to be created, you need more than ‘tons of natural resources and almost unlimited labour’. You need the means to connect them in productive ways. This is not about the existence of resources but how they are marshalled and deployed. It’s about institutions and organisations. What you are not getting (I think) is the difference between ‘money as a resource’ (which it is not) and money as an instrument of power, a means by which people exercise control over available resources in particular ways.

How money is used

Economics textbooks will tell you that money has three core functions: as a means of exchange, as a store of value, and as a unit of accounting/measurement. This is true (partially). But if we look at how money is actually used in our society, we quickly see another story: money’s role as an instrument in the exercise of power, defining what decisions get made and implemented, by who, and how. Let’s unpack this a bit.

First, our current institutional framework makes the availability of money in certain bank balances the pivotal consideration in decision-making. It makes money the instrument which controls the deployment of available resources (versus say, the decisions of temple administrators as in Ur and Babylon, the military might of emperors, church authorities in medieval monasteries, legal requirements or democratic decision-making).

Second, it places the bank balance arithmetic of “we can only do what we can afford” centre stage while quietly removing “we can afford what we can actually do” from the agenda. (The potential consequences of this were illustrated during the great Irish famine which turned a natural disaster — potato blight — into a policy of genocide, by insisting that food would only go to those who could afford to pay for it. Result? There was enough food to feed people in Ireland, but this food was exported and a million people starved to death.)

Third, in reducing decision-making to bank balance arithmetic, it hands power to the person who holds the purse strings. They are the ones who have money to spend and can therefore say Yes or No. Those without money are left powerless.

Fourth, it also hands control over the criteria and purposes of such decision-making to these people, making money the means by which we measure the value of alternative courses of action e.g. make loads of money or alleviate human pain and suffering. In a moneyocracy things which make money holders richer tend to get prioritised while things that don’t get demoted.

Fifth, having decided what to prioritise (and therefore what not to do), money is used as the mechanism for parcelling these priorities out. This budgeting process -‘we’ll spend X on this, and Y on that’ — then paves way for step six: where different ‘pots’ of money become the basis for the next layer of administrative decision-making: ‘If this spending is in the budget, fine, go ahead!! If not, No way‘

Seventh, such detailed operational management of budgets is the means by which available resources are finally marshalled and deployed: where peoples’ work and related raw materials etc are paid for. At this point, fundamental choices about goals and priorities made far away get translated into direct power over a myriad of day-to-day operational realities: of what gets done and what doesn’t get done.

None of these activities actually derive from the nature of money itself. They are a product of a particular set of institutions that have been constructed around money to make it a tool in the exercise of power. Because most of the intervening steps are rendered invisible to the casual observer, it’s very easy to jump from the beginning (the existence of certain bank balances) to the end (what gets done) and to treat them as one and the same: the illusion that money is a ‘resource’. This is the Money Mirage at work.

The pre-requisites of wealth creation

But what has this got to do with Africa? To see the connection we need to ask ‘what are the necessary pre-requisites of wealth creation?’

Many stars need to align. First, we need effective institutions capable of making supportive rules that then get enforced. To create wealth you need a safe, stable environment. Peace and law and order are good for wealth creation. Civil strife, conflict and chaos are not.

Second, you need infrastructure. Whatever they are — roads, railways, sewerage systems, dams that supply fresh, telephone lines, electricity and gas supply systems, schools, hospitals, homes — without such infrastructure effective wealth creation becomes well-nigh impossible.

Third, you need organisations that depend on this infrastructure to apply specific knowledges to produce desired outcomes such as supplying bread, wine or motorcars, or curing the sick. Without organisations which provide the detailed administrative and bureaucratic mechanisms by which the marshalling and deployment of resources is planned, directed, organised and coordinated, very little wealth would be created.

Fourth, you need the knowledge, skills and work that people deploy to undertake these activities.

Fifth, you need available material resources (which may vary massively across different geographies).

Building momentum

Institutions, infrastructure, organisation and know-how: like Rome, none of them are built in a day. Just imagine trying to bake a loaf of bread for example if, first of all, you had to build the equipment to thresh the wheat and construct a mill to mill it; if you had to make the oven and find the wood to fuel it; craft the pots to mix the dough, and so on.

All ongoing wealth creation depends on the prior development of such capabilities and capacities. Everything else depends on them. This makes real wealth creation a bit like a supertanker: it’s all about accumulated momentum.

It has taken an enormous amount of energy and effort over centuries to build the institutions, infrastructure, organisations and knowledge that provide modern economic supertankers with their momentum. Once this momentum is built, it tilts the playing field in the supertanker’s favour, making further wealth creation a downhill ride; a swim with the tide. The other side of the coin: the lack of these enablers tilts the playing field sharply in the opposite direction, creating an uphill struggle: a swim against the tide.

The African experience

The case of Africa illustrates what can happen when you are swimming against rather than with the tide. Large parts of Africa remain ‘pretty broken’ because thanks to imperialism, the opportunity to develop such institutions, infrastructure, organisations, skills and knowledge was positively undermined for over a century. The British Empire for example was particularly good at four things: plunder, neglect, ‘divide and rule’, and institutional scorched earth.

• Plunder: Wherever they saw the opportunity, the Brits extracted as much wealth as they could, from mines, plantations, the slave trade and so on, without putting anything back in.
• Neglect: When the Brits left Bechuanaland (now Botswana) in 1966, they left it with 8km of paved road, no power grid, no phone lines, no sewerage system, one doctor for every 26,000 people, eleven university graduates and 100 citizens with completed secondary school education.
• Divide and rule: To solidify their rule, they deliberately set local populations at each others’ throats. For example, in the Sudan they set the Islamic north against the Christian south. The resulting genocidal civil wars lasted for 50 years after independence, well into the 21st century.
• Institutional scorched earth: Colonial administrators did their best to either destroy or corrupt local institutions so they could not act as alternative sources of authority and legitimacy. For example, in Botswana there was a tradition of ‘kgotla’, community courts where everyone was allowed to speak (no interruptions allowed), where decisions were arrived at by consensus and where even chiefs were rendered accountable. The Brits over-ruled both the processes and the decisions of these kgotla.

If effective wealth creation depends on the effective development of institutions, infrastructure, organisations and know-how, Africa was stripped of and denied them.

Just how hard the resulting uphill struggle can be is illustrated by the ‘resource curse’. Without robust institutions to handle the situation, the availability of rich resources can encourage corruption as local politicians connive with global corporations to take a slice of the loot, leaving the rest of the country and its populace to rot. All available investment goes into resource extraction (oil, gold, cobalt, whatever) and none into basic infrastructure. Local institutions are twisted and corrupted to prop up local elites. Civil wars break out as rival groups fight to gain control. Inflation kicks in, fuelled by cash influxes from the resource extraction. Other local industries can’t compete either for talented people or investment.

The tragic result of the resource curse is that countries which have the potential to be very rich end up being amongst the poorest.

Such outcomes are not a foregone conclusion however. In Botswana for example, soon after the Brits left, rich diamond fields were discovered. This time, the local Botswana leader Seretse Khama deliberately set out to avoid the resource curse. He went in hard against corruption amongst government officials. He reinstated ‘kgotla’ for the purposes of conflict resolution, alongside more formal mechanisms of parliamentary democracy.

He used state power (not financial power) to make sure the Government got a growing share of the revenues generated by the diamond mines and used the funds to invest heavily in infrastructure, other industries, health services and education. Every village with a population of more than 500 had its own health clinic. Heavy investment in education took literacy rates to 80% within a few generations. Other, non-mining industries such as agriculture and tourism were encouraged. Soon, per head income in what had been one of the poorest countries in Africa was three times higher than neighbouring Zimbabwe.

Back to the question

You could interpret the Seretse Khama story as proof of the power of money as a resource. Some people spend it wisely. Others don’t. But if you dig a little deeper, it quickly becomes apparent that in order to ‘spend his money wisely’, Seretse Khama had to do a a wide range of things.

He had to reform and build institutions (campaign against corruption, promote kgotla), build infrastructure, build wealth creating organisations, spread education. Effective wealth creation isn’t just about good or bad decisions about ‘how to spend available money’. It’s about institutional design: about who makes what decisions, how, using what criteria. In other words, it really is about power.

Questions that are begged about money’s role as an instrument of power include:

• how did those who hold the money get it in the first place? (Legitimately, or illegitimately via violence and exploitation?)
• Who are the people making the decisions as to how this money should be deployed (e.g. ‘spent’)? How were they appointed? In a moneyocracy, decision-making rights go to those with the money. In a democracy, other people, appointed by other means, get to make the decisions.
• What criteria are they using to make their decisions relating to the deployment of their money? What purposes are they pursuing? Is it ‘what will make me even more money?’ or is it some other objective such as the alleviation of human pain and suffering?

How resources are marshalled and deployed depends on the answers to these questions — answers that relate not to money itself but to the institutional framework in which money operates. Once we recognise the fact that money as an instrument of power (and not just as a neutral ‘means of exchange’ or ‘store of value) then all sorts of questions about who deploys this power, for what purposes, and why pop up.

About whether we want to live in a moneyocracy or a democracy for example.

Previous: 19. Who will pay for the Covid bailout?

Next: 21. We can afford what we can actually do

The full contents of this blog series can be found here.

Bibliography

Books and articles I found particularly useful researching this blog include:

• Kwasi Kwarteng, Ghosts of Empire: Britain’s Legacies in the Modern World, Bloomsbury, 2013
• Douglass C North, Institutions, Institutional Change and Economic Performance, Cambridge University Press, 1990
• Herbert A Simon, Administrative Behaviour: A Study of Decision-Making Processes in Administrative Organisations, The Free Press, 1997
• Nicholas Shaxson, The Finance Curse: How global finance is making us all poorer, Bodley Head, 2018
• Jonathan Tepperman, The Fix: How Nations Survive and Thrive in a World of Decline, Bloomsbury 2016