Thoughts on Economics Part 1

 For some time I have been concerned that the way that economics is understood and used has some fundamental mistakes.  It is clear that in order to try to understand the economy a standard of measurement is needed. Often to try to see how something works something is measured. In finance and economics this has been money. When we measure GDP, government borrowing, the benefit of a policy they all get referred to pounds or dollars or some other  currency. However this makes the basic assumption  that all pounds are the same which I believe is false and such analyses always benefit those who are better off, and the better off someone is, the more they benefit from such analyses.

 Let me give two anecdotal stories which illustrate how this works. The first is personal and relates to my father. he was an hourly paid worker. How did he cost things? Was something worth paying for?  He did not look at the cost in pounds, shilling and pence. No, his simple analysis was based on how many hours he needed to work to pay for the item/event. Another example was at a time when a Labour government introduced a maximal pay rise that could be granted, this was in 1975 and I think it was £6. A friend who worked for USDAW (Union of Shop, Distributive and Allied workers) most of whom were in low paid jobs, explained that for their workers this was a much heralded pay rise. For higher paid workers it was seen as insulting.

 Recently Andy Burnham announced a reduction of VAT on electricity bills. It was claimed that this was trivial as it would only save £40 a year. To most people that might seem trivial but for families with children on school meals that might mean they can afford to feed their children during school holidays, It was not that long ago that Marcus Rashford campaigned to help families in that situation. To a person who has a low income and is struggling to reach the end of the week with only a pound in their pocket, it could make a significant difference. So forty pounds is a lot of money to some people.

  It is important to see how this consideration needs to be brought into our thinking about tax and benefits and I will return to that in a later post.