It seems to have taken more than five years for the following argument to make it from the doorstep to the TV debating programme – five disastrous years for British politics, in which people who simply don’t understand the workings of the economy have been able to pretend they do, simply by waving their credit card at you and saying “maxed out”.

These are the people who voted Conservative in 2010 and 2015, in the mistaken belief that George Osborne had told them something approximating the truth about how the economy works.

Silly, silly people. George Osborne doesn’t understand the economy himself, so he’s hardly in a position to explain it to others.

It’s true – This Writer had an argument with the Treasury about Osborne’s economic policy a few years ago, pointing out that it was based on a theory that, itself, is based on a spreadsheet mistake. The responses I received tried to justify Osborne by pointing at other academic literature – which was also based on the same mistake.

I was watching BBC Question Time on Thursday evening, and would have written something similar to what follows if I had not been duty-bound to be elsewhere for most of yesterday. Martin Odoni got there first, on his excellent blog, The Critique Archives. He writes:

I should know better than to watch BBC Question Time… I was soon listening to one of the most obtuse audience-members Question Time has ever had. He said, as follows; –

‘Economics is really simple. I’ve got ten pounds in my pocket. If I go out and buy three pints of beer in Cambridge, I’m probably borrowing money. If I carry on doing that, then I’m gonna run out of money, and I’m gonna go bust. It’s not difficult, guys.’

So yet again, Joe Public thinks the words ‘economics’ and ‘budgeting’ are freely interchangeable. I was mentally screaming at my PC screen as he spoke, something I do a lot when watching Question Time, which is one of the reasons I tend to avoid it these days. But this was particularly maddening, as it reminded me that way too many people still think that they can use their private incomes as an analogy for a national economy.

The guy in the audience did not help himself in that he chose to make the comparison while arguing with Yanis Varoufakis, one of the better-informed economists in all of modern Europe, and sure enough Varoufakis slapped him down with relaxed ease.

But we should still make no bones about this; the guy in the audience is completely illiterate economically. Not just slightly, completely. [bolding mine – VP] And so is anyone who agrees with him. For not only does a national economy work differently from a household budget, it in fact works the opposite way in several critical respects, as any activity put in has feedback effects that do not happen to the money people spend when they ‘go out for a few drinks’.

Let us compare; –

A household budget is linear; the household receives money at the beginning of the line, what we call the ‘income’, saves it for a while, then spends it at the end of the line, what we call ‘outgoings’. Before and after this line, the money is not part of the household budget.

An economy is a circle. The Government issues money via the Central Bank to pay for services, the money goes round and round the population, and then eventually it arrives back at the Government in the form of tax, whereupon more money is issued to pay for more services, and round it goes again, ad infinitum. The money does not leave the economy at any point in this circle (except when used for foreign trade, but even then it will probably soon be back).

Cutting spending in your private life is likely to result in you having more money, certainly. But for the nation’s Exchequer, cutting public spending usually means also reducing the income heading the other way, so it may not result in having more money. In fact, it can be a very delicate calculation, sometimes even dependent on luck, establishing what to target spending on, how much to spend in order to get the right feedback, and predicting precisely how much the feedback will be.

What is this calculation? Well, the term whose meaning we can be sure the guy in the checked shirt is unaware of is ‘fiscal multiplier’.

Now visit The Critique Archives to learn why – and discover the effect of George Osborne’s childishly illiterate economic policies on the UK economy.

Source: Good Grief, Not That Analogy Again | TheCritique Archives

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