As the saying
attributed to the Emancipator Daniel O’Connell goes, “England’s difficulty is
Ireland’s opportunity.” In this case,
however, England’s difficulty is also England’s opportunity . . . as well as
everyone else’s.
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| Daniel O'Connell, The Emancipator |
Specifically, the
“Brexit” has caused widespread concern in both England and Ireland that there
will be serious and long-lasting consequences.
That is absolutely correct.
What is not
correct is that the consequences are necessarily negative. The Brexit can turn out to be a very good
thing for everyone. It depends on what
is done with it.
As things are
going, of course, it looks pretty grim.
The falling Pound is making Irish exports to Great Britain more expensive
for the British — and Great Britain accounts for 40% of all of Ireland’s
exports. Even a relatively small drop in
the value of the Pound against the Euro gets magnified all out of proportion
when the percentage is that large.
For example
(assuming a general demand curve with a slope of 1, that is, a direct
one-to-one relationship in the supply and demand curve, and everything being
equal), a 10% drop in the value of the Pound against the Euro would mean a 10%
drop in exports . . . which translates into a drop in exports from 40% to 36%,
or 4%, which is definitely something to worry about.
In contrast, a
10% drop in the value of a currency when the country with the falling currency
only imports 1% of the other country’s exports would mean a decrease under the
same assumptions from 1% to 0.9%, or 0.1%, which while a matter for concern, as
is any drop in exports, is not as worrisome as 4%.
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| Keynes: government debt is good. |
The situation is
exacerbated by the fact that Ireland is doing what it should have done decades
ago: decrease debt. Its target is 45% of
economic output, where the European Union’s upper limit is 60%. Of course, under standard Keynesian
assumptions, this means that Ireland will have to increase its reliance on
infusions of foreign capital as domestic capital is decreased by the paying
down of debt.
And there’s the
rub. Under standard Keynesian
assumptions, fiscal responsibility translates into financial
irresponsibility. How, after all, can
Ireland maintain its rate of growth when it cannot guarantee that there will be
sufficient infusions of foreign capital?
It can’t, and
that is why the experts are worried about Brexit and are predicting slower
rates of growth. Yet the obvious answer
is right in front of them.
First, what is
capital, specifically in this instance, financial capital?
Money. (And credit we might add, but as Henry
Dunning MacLeod pointed out over a century ago, money and credit are
essentially the same thing, money being the most general form of credit.)
And what is
money? Anything that can be accepted in
settlement of a debt.
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| Jean-Baptiste Say |
To explain, we go
back to the first principle of economics, stated by Adam Smith in The Wealth of Nations: “Consumption is
the sole end and purpose of all production.”
This leads us to
“Say’s Law of Markets,” which is, everything else being equal, the only way to
consume something is to have produced something with your labor, land, and
technology, either for your own consumption, or to trade to others for what
they have produced so you can consume what others produce.
Thus, the only
way to consume is either produce it yourself for yourself, or to trade to
others for they have produced that you want to consume. This gives us the usual brief summary of
Say’s Law: everything else being equal, demand generates its own supply, and
supply its own demand.
The medium
through which you exchange what you produce for what others produce is called
“money.” Money is therefore a contract;
all money is a contract, just as (in a sense) all contracts are money.
The bottom line
here is that if you (or your country) can produce, financing should be no
problem. As long as you have a customer
(whether yourself or someone else), you can enter into a contract to exchange
productions. All a commercial or central
bank does, in fact, is make it easier for people to carry out exchanges of
their respective productions.
That’s why it’s
such a bad idea to back money with government debt. Government debt is a contract that promises
to deliver what somebody else produces.
The assumption is that the government will be able to tax people and
take part of what they produce to redeem its promise.
It would be so
much easier and more efficient just to have banks or businesses “create money”
backed by contracts drawn on existing and future marketable goods and services
instead of government debt. That way
there would always be exactly enough money in the economy to carry out all
transactions, including investment in economic growth, but without one penny of
government debt.
If every country
in the world created money this way, all money would have a stable value and be
backed with private sector assets instead of government debt. One proposal to do exactly that can be found
in the final chapter of Easter
Witness: From Broken Dream to a New Vision for Ireland (2016).
Given stable and
asset-backed currencies, there would be no need to worry about one currency
falling against another and conferring advantages or disadvantages on either
trading partner. People could also stop
worrying about globalization, job movement, labor redundancy in the face of
advancing technology, and so on.
It’s at least
something to think about.
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