Friday, 5 April 2013


I don't understand economics very well. Or maybe that's macro-economics. Quantative-easing, that sort of thing. Supply and demand, market forces, I'm ok with that, but not when it comes down to printing money and restricting the money supply.

My view on Cyprus recently was quite simple. Let it fall out of the Euro and see what happens. If it's bad, then we protect Greece, Spain etc. If not, then maybe next time we let them go their own way. It seems to me that it's a bit like being a member of a golf club. I wouldn't expect other members to pay for me if I fell on hard times and couldn't pay my subscription. It might be (ok, it definitely would be) harsh on the citizens of cyprus, but they have a democarcy and thus all share in the state they have ended up in.

But recently I read a very good article in the London Review of Books here. I especially liked the bit about how an unexpected ten pounds had a much wider effect on the economy as a result of becoming a multiplier. I'm probably not supposed to quote this much text, but as it's less than a paragraph I'll give it a go (If you're from the LRB please let me know if you're unhappy):

Imagine for a moment that you come across an unexpected ten pounds. After making a mental note not to spend it all at once, you go out and spend it all at once, on, say, two pairs of woolly socks. The person from the sock shop then takes your tenner and spends it on wine, and the wine merchant spends it on tickets to see The Bitter Tears of Petra von Kant, and the owner of the cinema spends it on chocolate, and the sweet-shop owner spends it on a bus ticket, and the owner of the bus company deposits it in the bank. That initial ten pounds has been spent six times, and has generated £60 of economic activity. In a sense, no one is any better off; and yet, that movement of money makes everyone better off. To put it another way, that first tenner has contributed £60 to Britain’s GDP. Seen in this way, GDP can be thought of as a measure not so much of size – how much money we have, how much money the economy contains – but of velocity. It measures the movement of money through and around the economy; it measures activity. If you had taken the same ten quid when it was first given to you and simply paid it into your bank account, the net position could be argued to be the same – except that the only contribution to GDP is that initial gift of £10, and if this behaviour were replicated across the whole economy, then the whole economy would grind to a halt. And that, broadly speaking, is what is happening right now. People are sitting on that first tenner.

It reminded me of my simplified underlying belief in how the economy works: tell people they are living in a booming economy and they will spend, tell them it's a recession and they get worried and don't spend.

So, I'm just off down the pub to spend my tenner. How about you?

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