Hey, folks. Meet the economics 'genius' behind Jeremy Corbyn

That is to say, here's Richard Murphy, everybody!

Arctic monkeying

He's spent much time and effort raging against what he sees as tax abuse. One aspect of this is the sort of thing that IR 35 and Arctic Systems was all about: set yourself up as a personal services company, take a minimal wage, pay out the profits as dividends and save on the employers' national insurance. Back when this was all the rage the first £10k in profits were entirely tax free, too.

He wrote at least one report (for the TUC) where he insisted that this really was the most appalling tax abuse. If people were to income shift, he argued – i.e. wifey gets a slug of the company, some of the dividends are paid to her, bringing her as-yet unused tax allowance to the table – then this was behaviour up with which we should not put.

He has written reports denouncing as tax abuse the very practices which he applauded in The Observer as recommendations of ways to save tax.

His response to having that pointed out was that he was really, however well disguised it was, making sure that the government of the day knew that these schemes abounded, and that once alerted they would close them off.

Err, yes, well. If you say so.

I agree that my approach here veers towards monomania. But I have good reason for it.

Just about everything he believes about economics is wrong on the simple grounds that, in my view, he doesn't actually understand the subject. That he might be advising the next prime minister somewhat worries me: there's plenty of sensible left-leaning economists out there who do know one end of a curve from another. One would hope that the country would be guided by them, not Murphy. ®

Bootnote from Vulture Central's backroom gremlins

* QE is meant to offset slowdowns in people's spending rates, which can be deflationary, by increasing the actual amount of money circulating in the economy.

Since prices take time to adjust downwards, a slowdown in cash spending can become a self-fulfilling prophecy, whereby goods go unsold and people get laid off, causing spending rates to fall even more and so on.

QE is designed to be temporary, though, because once people's spending rates recover we need a way of taking all that extra money out of the economy. So we do it by using printed money to buy bonds, which injects the money into the economy, and then sell those bonds back once we need to withdraw the money from the economy, and simply destroy the money we've raised.

MV = PQ is how economists think about the impact of printing money on inflation and the economy in general. It stands for Money x Velocity = Prices x Output (Q or Y). The right side of equation represents the price level (all the goods being sold times their price), and the left side represents the amount being spent in the economy in a given period. In stable times, these things are the same.

Velocity is the rate people spend money at: consider that if we have £100 in notes in the economy and we spent them once, in a stable economy prices would add up to £100. If we spent them twice, they'd add up to £200, and so on. So Velocity matters just as much as the quantity of Money in determining the price level.

When Velocity falls, as it did in 2008, you can end up with a sort of musical chairs situation where you have an imbalance between the two sides – too little spending going round (MV) to cover all of the goods being sold (PQ) – which in the short term means that goods aren't sold and some wages can't be paid, so people get fired. So we try to boost the money supply (M) to counterbalance the fall in V, which is what QE basically is.

One way of thinking of Velocity (which is the really difficult part of the thing to conceptualise) is as the inverse of 'money demand'. In good times, when I'm confident about the future, I don't try to hold on to much cash or cash-balance savings. When I start to worry about the future, I try to build up a cash reserve in case I get fired, etc, and I spend money less willingly.

But we need to be able to reduce the amount of money in circulation as well, because if V rises and we have too much money going around in the system, we'll end up with an MV that is much higher than the price level, which starts to push up prices (P) and creates inflation. So you need to be able to sell the bonds you bought and destroy the money you raise.

If we don't have any bonds to sell, it's not clear how we can reduce M if large-scale inflation hits.

M0 and M4 are defined here.

Other stories you might like

Biting the hand that feeds IT © 1998–2021