John Lanchester points to something identified by the International Monetary Fund earlier in the year.
It concerns a technical economic factor called the multiplier, and that in turn involves us in a discussion of what GDP is and how the economy works.
Imagine for a moment that you come across an unexpected $10. After making a mental note not to spend it all at once, you go out and spend it all at once, on, say, two pairs of woolly socks.
The person from the sock shop then takes your 10$ 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 $10 has been spent six times, and has generated 60$ of economic activity. In a sense, no one is any better off; and yet, that movement of money makes everyone better off.!!
Uh?
To put it another way, that first tenner has contributed $60 to 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 $ 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 $10.
Richard Feynman was once asked what he would pass on if the whole edifice of modern scientific knowledge had been lost, and all he could give to posterity was a single sentence. What axiom would convey the maximum amount of scientific information in the fewest possible words? His candidate was ‘all things are made of atoms.’
In a similar spirit, if the whole ramshackle structure of contemporary macroeconomics vanished into thin air and the field had to be reconstructed from scratch, the sentence which packs as much of the discipline into the fewest possible words might be ‘governments are not households.’
It concerns a technical economic factor called the multiplier, and that in turn involves us in a discussion of what GDP is and how the economy works.
Imagine for a moment that you come across an unexpected $10. After making a mental note not to spend it all at once, you go out and spend it all at once, on, say, two pairs of woolly socks.
The person from the sock shop then takes your 10$ 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 $10 has been spent six times, and has generated 60$ of economic activity. In a sense, no one is any better off; and yet, that movement of money makes everyone better off.!!
Uh?
To put it another way, that first tenner has contributed $60 to 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 $ 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 $10.
Richard Feynman was once asked what he would pass on if the whole edifice of modern scientific knowledge had been lost, and all he could give to posterity was a single sentence. What axiom would convey the maximum amount of scientific information in the fewest possible words? His candidate was ‘all things are made of atoms.’
In a similar spirit, if the whole ramshackle structure of contemporary macroeconomics vanished into thin air and the field had to be reconstructed from scratch, the sentence which packs as much of the discipline into the fewest possible words might be ‘governments are not households.’
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