The banks, the BBC and ‘Economic Activity’

Is ‘economic activity’ always a good thing? The banks hit by the bonus tax have raised the spectre of lost incomes and tax revenue if they choose to relocate away from the UK. The British Broadcasting Corporation (BBC) has recently sought to justify the licence-fee by calculating the revenues its commissioning generates for independent production companies. But it’s a deeply misleading idea that the benefit of any activity can be calculated by measuring the quantity of money that is involved in purchasing or producing it. Because money is the definition of wealth to each of us as individuals, it’s easy to forget that in itself it is pretty much worthless paper or more commonly today, an electronic pattern on digital media. For the welfare of the nation in which it is generated money represents no additional wealth whatsoever.

The great Scottish economist Adam Smith got it right, when he described money as simply ‘the great wheel of circulation’. Money, by being a sort of placeholder for work, goods and services when these are exchanged across time and distance, allows us to produce things and move them about when an impossible degree of co-ordination would otherwise be required. When we produce something new from basic materials, or make sure that goods end up in the hands of those that want them the most, we can make ourselves better off. We’ve got to realise, however, that the quantity of money that flows from hand to hand always represents the price paid for the whole of what is produced or exchanged, and not the benefit that is actually gained from the process. If you pay a dodgy builder £1000 for a half-done roof repair that falls on his head, it’s a waste of materials, his skull and your hard-earned cash, but it’s still a £1000 of economic ‘activity’.

One of the most important ideas introduced in basic economics courses is that of ‘opportunity cost’. To earn a profit, the economic cost of any good or service must always be at least equal to whatever else could have been done with the resources used up. But this means that we can consider a converse concept, that we might call ‘opportunity benefit’, which is what can be done with the resources released by not doing something. In considering what might happen if banks withdrew from the UK, or the BBC lost some of its funding, we must consider what the bright and creative people no longer employed by them might do instead. Perhaps become doctors, nurses or social workers? Reduced incomes might result, but this doesn’t in itself reduce the wealth of Britain. That only happens if, associated with these reduced incomes, there is a reduction in welfare-enhancing production or exchange. If there is no such reduction, then the only result is that certain groups’ (finance workers and TV producers) claims on society’s wealth shrink while those of the rest of us are relatively increased. I make no judgement here about the real worth of bankers and TV people to society, but such judgements are relevant to economic debate and are rarely discussed.

What about lost tax revenue? The banks contribute huge amounts of corporation tax, say their lobbyists, and their highly-paid executives pay high rates of income tax. Indeed they do, but the monetary revenue out of which they pay tax has come from somewhere, and could have gone elsewhere. With two exceptions I’ll come to, if the banks and their employees hadn’t paid tax on it then someone else would – perhaps more, perhaps less! And if less, this doesn’t mean the money disappears! It simply means it stays with individuals or firms rather than goes to the government. Are the banks arguing that more money for the government and less for you and me is a good thing? I think they should make their views clear! The first of the two exceptions is when money has been created for the purpose of producing a bank’s revenue. Now the bank has access to a new claim on society’s resources, and the only justification for this can be that they are going to produce something of benefit to society. Secondly, the bank’s revenue may be in the form of foreign currency. An inflow of foreign currency is important, but if not balanced by outflows we risk impoverishing the rest of the world – which is not a sustainable position. And we should bear in mind that foreign-owned banks operating in the UK are ultimately in the business of repatriating our money in the form of their profits.

So don’t let’s be taken in by scaremongering from interested parties about lost jobs, revenues and taxes, without considering what’s really being gained and lost.

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