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NZ's riposte to modern economic myths



New Zealand's decision to introduce Gross National Well Being (GNWB) in its annual budget is not only important because it represents a broader way of tracking what is actually happening in the country. It is a step towards unravelling the fundamental myth of modern economics: that financial transactions are real, and everything else is not. It also raises a vital question that will soon become the most important question facing modern society: what is money, and what should be its proper role?

New Zealand Prime Minister Jacinda Ardern attends a tree planting event at Mount Victoria in Wellington in June 2019. (Photo by Hagen Hopkins/Getty Images)The GNWB measure is being proposed as an alternative to Gross Domestic Product, or GDP. GDP is a measure of financial transactions; it only tracks the exchange of money. Its origins date back to the 17th century, but it was popularised by the economist John Maynard Keynes during World War II, when it was considered an important way to measure resources for the war effort (he thought it would be discarded after hostilities were over).

An increasing number of commentators are noting that GDP is an arbitrary 'jerry-rigged construction' but because it is comparatively easy to calculate, it has become the global measure of national wealth and, by implication, national economic health. That it is deceptive is hardly a new insight. Robert F Kennedy famously pointed out the absurdities, commenting that GNP (a similar metric) 'measures everything except that which is worthwhile'.

The basic problem is that money can be transacted for things that are bad — Kennedy's examples were air pollution, road deaths and cigarette advertising — but as long as more transactions occur, the illusion is created that the economy is growing, which is, ipso facto, good. Thus, Japan's GDP rose sharply after the tsunami disaster, the economy 'grew'. New Zealand's GNWB initiative is a welcome departure from that financial Matrix and will track better what is really happening in the country. It is to be hoped other nations follow suit.

The initiative is important for another reason. The most pernicious trick of mainstream economics is to put money first and everything else second. This is not just ethically dubious, it is a catastrophic logical error. Money is a tool, an instrument, created by human societies. It is not a force of nature that 'flows', or 'reaches equilibrium' or any other of the intellectual sleights of hand that economists use to make it appear as if they are studying natural forces.

As the scholar Mary Mellor has pointed out, neoliberal economics 'has tricked us into believing a fairy tale about where money comes from'. She points out there is nothing natural about money; it is more an artefact of power than anything else. Neither is it true that money is essentially connected to, and generated by, the marketplace, that it is always in short supply and that public spending is always a drain on the wealth creating capacity of a society. Yet all these fallacies are central to mainstream economics.

This might be mainly of academic interest were it not that the monetary system of the world is fast entering a state of deep uncertainty that, very probably, will result in deep crisis. In 2007-2008 the monetary system of the world went within hours of total collapse because of a bank run in the wake of a collapse of the market for derivatives (financial instruments 'derived' from conventional financial assets; essentially a giant global finance sector casino whose value is currently over $US500 trillion). Are derivatives 'money'? Hard to say. What is certain is that the risk has not gone away.


"That lending is reaching unsustainable levels, which means money has become not so much a means of exchange as institutionalised usury."


Then we have the emergence of crypto currencies, starting with Bitcoin but now soon to be adopted by Facebook. Are these 'money'? Hard to say.

Then we have the perilous expansion of global debt. Banks are the biggest creators of money; they do much more than simply act as mediators between savers and borrowers, they typically lend out at least 20 times their capital base. That lending is reaching unsustainable levels, which means money has become not so much a means of exchange as institutionalised usury.

Global debt is well over 300 per cent of world GDP and the only way to stop it collapsing is to keep interest rates at negligible levels — that is, kick the can down the street. And even at such low interest rates, cracks are showing, with 78 per cent of American workers living from paycheck to paycheck because of unpayable debt — despite the belief that the American economy is supposedly doing well. Similar problems are evident across the developed world; in Australia it is excessive mortgage debt. As these stresses get worse, it will become vital to ask the questions: 'What is money and what do we want it for?'

There may be a deeper reason why the quasi-scientific, neo-liberal myths of modern economics took hold. Jason Tuckwell, lecturer in philosophy at the University of Western Sydney, notes there is a widespread tendency to treat human-created things as if they somehow emerged from the natural world. There is a strange willingness to forget they were designed by humans for a purpose (Tuckwell points, as an example, to the widespread surprise when Facebook's true motives were exposed).

Money is a human-created thing; it is not a blind, natural force. Prosecuting that fiction has led to the dangerous myths of modern economics. But at least New Zealand is trying to develop a more refined understanding.



David JamesDavid James is the managing editor of businessadvantagepng.com. He has a PhD in English literature and is author of the musical comedy The Bard Bites Back, which is about Shakespeare's ghost. Main image: New Zealand Prime Minister Jacinda Ardern attends a tree planting event at Mount Victoria in Wellington in June 2019. (Photo by Hagen Hopkins/Getty Images)

Topic tags: David James, New Zealand



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Existing comments

As always, informative and enlightening. Thank you David.

Steve Sinn | 03 July 2019  

National governments create money, not banks and its the degree of scarcity of that money that is somehow perceived to be linked to the degree of productivity of people engaging in economic activity. Cash replaced gold as a trading medium however with such high levels of global debt, and low interest rates, cash is losing its value while gold stocks soar in value. GDP is a measure of public and private sector spending but its questionable whether it is an accurate gauge of productivity. Economics involves human perception concerning how people and organisations spend scare resources, therefore like psychology, there is never a definitive formula or model. Perhaps business net profits, household discretionary income and government net debt would be more realistic criteria on which to judge a nations well being??

Dominique Narenza | 03 July 2019  

Dominique, banks do create money, whenever they lend. The problem is that they simultaneously create equivalent debt. They are not merely lending savers’ funds invested with them. Nearly all, and way too much, of the money in the economy is bank-created. The think about govt-created money is that it doesn’t come with private debt strings attached. It and only it adds to the economy’s net stock of financial assets.

Alan Luchetti | 03 July 2019  

Most modern nations are currency sovereigns. That is they issue their own currency, not backed by any tangible commodity. The initial value of the currency comes from it being the only way taxpayers pay their taxes, and then it becomes generally used as a thing of value to be swapped for goods and services. These nations create money by spending it into the economy, and taxation destroys that again. Government spending is not reusing 'taxpayer money' but creating new money. So the frenzy about surplus and deficit is totally unnecessary. We should not be 'balancing the budget' but balancing the economy, with social services as part of that. So moving towards full employment, full funding for public health and education, reducing or removing homelessness, putting an end to privatisation of public assets and services. Given the national government's ability to put the 'public purse' to good use. there is a school of thought that many areas should be renationalised. This would include utilities such as electricity and gas, road and rail (stop toll roads and PPPs for infrastructure), and even banks, which would provide the necessary banking deposit and loan services, and leave private institutions to do the derivative trading, investment banking etc etc The constraint on government spending is not the number of tax dollars received, but when the spending begins to have an inflationary effect in looking to purchase goods and services that are becoming scarce, and therefore more costly. I see this sitting well within a GNWB, and should become the norm for most countries. NOte: the EU countries do not have this luxury, as they are using a currency that they do not control

Martin Connolly | 03 July 2019  

Thank you David James. Can you please get this message out to the journalists in Canberra and the TV interviewers of politicians so that we can finally see some proper questions asked rather than the Dorothy Dix-ers that set up the PM and his finance and economics ministers to yet again deliver their infuriating neoliberal econobabble to us, the victims of it.

Liz Johnston | 06 July 2019