If Labor’s victory in Wakefield is to be more than another desperate political ricochet from a community ‘left behind’, the ‘purse bag’ economy that has held back public welfare debates for more than half a century should be dismissed. The handbag economy is based on the image of a (small) state housewife dependent on a (large) head of household, creator of wealth, market.
Big Daddy or sulky teenager?
The market has not proven to be a good householder. He does not see himself as the guardian of the public good. Whenever possible, he avoids taxes and hides his income abroad. Greed is declared good and there is no social stigma in the astronomical remuneration of leaders while entire communities languish. Being wealthy is considered good in itself, regardless of how the money is earned. Greed trumps need. The oligarchs polish their super yachts while the billionaires burn up the planet by spacewalking. Like sulky teenagers, rules and responsibilities are met with resentment while leaving a mess behind for others to clean up.
The hyper-rich disappoint their own parents. Adam Smith would find little evidence of the hidden hand of private self-interest producing public virtue. Margaret Thatcher, free market cheerleader and proud purse-carrier, didn’t see the philanthropy she hoped for blossom. Alan Greenspan, who as head of the US Fed has fueled financial exuberance, was appalled by the financial irresponsibility it unleashed.
The new kid on the block
The power of the purse economy lies in the overriding question that crushes all public welfare propositions: “where will the money come from?” The implication is that there is no money – nor magic money trees. All government spending is presented as an act of theft taking money out of the pocket of the beleaguered taxpayer (private sector).
A growing number of monetary economists avoid this trap by asking a slightly different question – where Is does the money come from? His conclusion is that money does not emerge spontaneously from market forces, nor does it have a fixed form or boundaries. The total money supply is constantly changing.
So where does the money come from? Most of the money in circulation comes from somewhere – this payment comes from these salaries – these salaries are paid by this company – the money of this company comes from investments, consumer payments, etc. However, there are two sources of New money that effectively comes out of nowhere: bank loans and government spending. These two elements create money: banks when they lend in expectation of repayment, and governments which establish budgets by anticipating tax and other revenues. The technical source of the two new currency issues is usually the central bank – but the authority of create this money comes from the state.]
The power of the state
The importance of state power to create new money was clearly demonstrated during the 2007-2009 financial crisis and the recent pandemic. Likewise, the pandemic has revealed the importance of the “real” economy of essential services, public and private.
It’s time to throw off the simplistic and misguided flavors of the handbag economy. Far from its claims to market superiority, markets ultimately need the monetary power of states. Work must free well-being from the political closet and build a policy for the future: a democratized participatory public economy and a responsive and responsible market sector.
By Professor Mary Mellor author of Money: Myths, Truths and Alternatives
Related: Market miracle: Why is the Bank of England still telling fairy tales?