Funding the Future

What is income? It sounds like one of the simplest questions in economics, but the answer matters enormously.

In this episode of Understanding Economics, I argue that income is not simply money received or money spent. At the level of the economy as a whole, income is the real value we can create and use without leaving ourselves and our planet worse off.

That distinction changes how we think about wages, profit, interest and rent. Conventional economics treats all four as forms of income.

But do interest and rent actually create anything, or do they transfer income created by other people?

And how much corporate profit represents genuine enterprise rather than economic rent extracted through ownership, market power or the extraction of value from labour?

There is an even bigger issue. If economic activity depletes natural resources, destroys environmental capital or consumes assets that cannot be replaced, can we really describe what results as income? Or are we mistaking the consumption of capital for a false measure of prosperity?

That question takes us directly to climate change, inequality and the way we measure economic success.

Understanding income means asking where value really comes from, who creates it, who receives it and whether our apparent prosperity can be sustained.

This is part of my Understanding Economics series, which explains economics from first principles and asks whether the conventional answers still make sense.

I spoke with Thomas Murphy, my son and the videographer and editor behind this channel, about something that matters to his generation: where can young people actually go to meet each other?

Pubs and restaurants are available, but they cost money and often assume that drinking or consuming something is part of socialising. Coffee shops close early. Youth clubs have disappeared. Schools and other community buildings have become expensive to hire. Hobby shops and other informal meeting places are struggling or have vanished altogether.

The result is the loss of what sociologist Ray Oldenburg called the “third place”: somewhere that is neither home nor work, where people can meet, talk, pursue interests and simply spend time alongside other people.

That matters when loneliness is becoming an increasing concern, particularly among younger people. Telling someone to “get a hobby” is not much use if there is nowhere affordable for that hobby to happen.

Tom and I discuss how online gaming has not filled this gap, why physical meeting places still matter, and whether vacant high-street shops could become community spaces with support from local and national government.

This is ultimately about more than young people. We need places where generations can mix, friendships can form, and communities can develop without everyone being required to spend money simply to be there.

Most people think economics is about money.

It isn't.

Economics begins with something much more fundamental: resources. Every society has limited resources and must decide how best to use them. Those decisions shape our lives, our prosperity and our future.

In this episode of Understanding Economics, I explain what economists should really mean when they talk about resources. Human labour, knowledge, wisdom, natural resources, energy, capital, education and institutions all make up the wealth on which every economy depends.

Money, by contrast, is not itself a resource. It is simply a claim on resources. Understanding that distinction changes the way we think about economic policy, government, markets and inequality.

I also explain why capital maintenance matters. If we consume resources without replacing or renewing them, future generations become poorer than we are. Economics should therefore be about stewardship as much as production, ensuring that we preserve, develop and improve the resources we inherit.

This video is part of my ongoing Understanding Economics series, which starts with first principles and builds towards explaining how modern economies really work.

If you'd like a clearer understanding of economics without unnecessary jargon, this series is designed for you.

UK inflation is rising again, and the danger is that the Bank of England will respond in exactly the wrong way.

Inflation is now 2.9%, household energy prices are expected to rise sharply this autumn, and disruption to energy supplies through the Strait of Hormuz threatens further increases. At the same time, drought is putting pressure on food supplies and prices.

None of this is being caused by excessive household spending or workers demanding too much money. These are supply-side problems. Yet the Bank of England could respond by raising interest rates.

Higher interest rates cannot produce food after a drought. They cannot create oil or gas. What they can do is increase mortgage payments, rents, car finance, credit card costs and other borrowing costs. They can reduce household spending, increase unemployment and make recession more likely.

That means households could be punished twice: first by higher prices for essentials, and then by higher interest rates supposedly intended to tackle those prices.

There is an alternative. The government has powers under the Bank of England Act 1998 that it could use in an emergency. There is a cost-of-living crisis. They say so. The Bank of England could be told to hold or cut rates. Independence does not mean that ministers have no responsibility for what happens.

If rates rise again, the resulting economic pain will not be inevitable. It will be the consequence of political choices.

There is speculation everywhere, including in the Financial Times, that the USA might go bust within ten years, and that the day of the dollar is over.

That framing is wrong. America cannot go bust, because its debt is denominated in its own currency and it can always create the dollars required to settle it.

But that does not mean we are safe. What can fail is the financial market itself, and that is the crisis nobody is preparing for.

The warning signs are everywhere. Share prices sit near all-time highs. Investment funds hold more of their money in shares than they almost ever have, with almost no cash left in reserve. The FT has concluded that US financial markets are "nuts" and have lost touch with reality. And bubbles always burst, and this one will. The promise that "this time is different" is always made, and it is always wrong.

This video explains what actually happens when confidence collapses, why our "animal spirits", as Keynes called them, can crash along with the markets, and why only governments can save us from the folly of finance yet again.

The biggest crisis we face is not that a crash is coming. It is that we have no plan to manage it. Think of this as the summer of 1939: a crisis about to emerge, with no one ready.

Every Prime Minister says defence is their first duty, and I agree. But defence means more than protection from foreign enemies. Serious threats to people are now arising within the UK, and millions of people are living in fear as a result.

Around 30% of the electorate now supports openly racist political parties that are deliberately threatening many in this country. The rights of disabled and neurodivergent people are being questioned. Hostility toward the LGBTQ+ community is rising. These communities are being targeted.

The resulting fear is not accidental. It is deliberately manufactured by politicians through threatening language and policy. And the people whose job it is to defend us, inclduing the Labour leadership, and Andy Burnham in particular, have met it with silence, inaction, and cowardice.

When Jason Arday died, Burnham offered no condemnation of those who had harassed him and has proposed no new legal or regulatory protections in response. He has not even said he might consider them. That silence is what allows intimidation to become politically normalised.

This video argues we need a radical new definition of defence: one that protects every citizen from fear and intimidation within our own society, not just from threats across our borders. Our current political leadership - from Labour and the Tories - is failing to provide that defence, and it is time that it did. 

Robert Jenrick says Britain has a welfare problem. He wants millions of people receiving sickness and disability benefits to move into work.

But there is a fundamental problem with that argument: where are the jobs?

UK unemployment is already around five per cent, youth unemployment is higher, vacancies have been falling, and there are substantially more unemployed people than available jobs.

You cannot solve an employment shortage simply by increasing the number of people required to look for work.

There is an even bigger contradiction. The Bank of England has been using high interest rates to suppress demand in the economy. Weaker demand means less investment, lower consumption and, ultimately, reduced demand for workers, as a result of deliberate government policy.

At the same time, just when Reform UK wants to push more people into the labour market while cutting the incomes of those who cannot find work, those benefit cuts would themselves reduce spending and demand, potentially destroying still more jobs.

None of this makes any macroeconomic sense. Getting someone, let alone millions of people, off benefits is not the same thing as getting them into employment. If Reform wants millions more people to work, it needs to explain where those millions of jobs will come from.

Until it does, one question remains unanswered: where are the jobs?

What is macroeconomics, and what does it tell us about how an economy really works?

In this episode of Understanding Economics, I explain why macroeconomics is about much more than GDP, economic growth, inflation and unemployment. It is about understanding the economy as a whole system in which households, businesses, banks and government are interconnected.

Conventional macroeconomics often starts from the assumption that markets tend towards balance, people behave rationally, and government plays a secondary role. But real economies do not work like that. They are constantly changing, markets do not always self-correct, and rising GDP does not necessarily mean that everyone is becoming better off.

I explain why money and government are central to understanding a modern economy, why government finances are fundamentally different from household finances, and why one person’s spending is another person’s income.

Most importantly, I argue that macroeconomics should begin with people. The real questions are whether an economy can provide useful work, stable prices and rising well-being, while using the resources available to us within the limits of the planet.

Understanding macroeconomics means understanding how all these things connect, and how government policy can change the outcome.

This is part of my Understanding Economics series.

Britain’s pubs can be busy, football grounds can be full, and airports can be crowded while millions of people are still struggling to pay for life’s essentials.

The cost-of-living crisis has not disappeared simply because some people cannot see it.

Britain remains a wealthy country, but that wealth and the incomes it generates are very unevenly distributed. Some people can still afford football tickets, meals out and foreign holidays. Others are struggling with housing costs, energy bills, food and transport. Both things can be true at exactly the same time.

And when it comes to visibility, there is another issue to consider. Spending does not necessarily indicate financial security. People use savings, credit cards and debt to maintain their lifestyles when their incomes no longer cover their costs. A pint in a pub or a week abroad tells us very little about someone’s underlying financial resilience.

Political economy asks us to look beyond these superficial signs of prosperity. Who isn’t at the football match? Who cannot afford the pub? Who isn’t travelling through the airport?

Those missing people matter.

The cost-of-living crisis is an inequality crisis. If we want to understand what is happening in Britain, we need to look at those who have become economically invisible, not just those we can still see spending.

In this podcast, I am joined by my elder son, James, to ask a deceptively simple question: why do schools prepare young people for examinations but not for adult life?

James describes arriving at university with a student loan and an overdraft, yet almost no understanding of budgeting, saving, rent, debt or credit. We discuss why this absence of financial education particularly disadvantages many young people.

But, as we noted, the problem goes well beyond money. Schools often steer pupils towards university without helping them decide what work they might enjoy or whether another route would suit them better.

At the same time, essential skills such as writing professional emails, preparing reports, making presentations, understanding tax and using spreadsheets are frequently neglected during formal education, but most are required by many employers

Then we considered how financial literacy could be integrated into mathematics through practical examples involving interest, VAT, borrowing and household budgets before moving on to discuss how artificial intelligence will transform employment, and why students must learn to use AI critically rather than treating it as a substitute for thought.

Finally, James proposes a National AI Skills Service and a new way of judging schools: not simply by examination results, but by whether their pupils flourish in adult life.

We covered a lot of ground.