Embedded Files
Helpful prior knowledge and learning objectives
Helpful prior knowledge and learning objectives
Helpful prior learning:
Section 1.1.1 The economy and you, which explains what an economy is and how it is relevant to students’ lives
Section 1.1.2 The embedded economy, which explains the relationship between the economy and society and Earth’s systems
Section 5.1.3 State functions, which explains the various roles of the state in providing goods and services, protecting the population, and stabilising and guiding change
Section 6.1.1 Money systems, which describes the parts, relationships and functions of money systems
Section 6.1.3 Modern money creation, which explains how forms of money are created in modern money systems
Section 6.2.1 What is finance?, which defines finance and describes the main tools of finance
Section 6.2.2 Purpose of finance, which distinguishes between regenerative and extractive finance, and between values and financial valuation; and discusses the extent to which profit-oriented finance can support regeneration
Section 6.2.3 Financial power and inequality, which defines financial power and identify key actors and factors that influence where money flows
Section 6.3.1 Why redesign money and finance?, which addresses the questions of who has access to finance, what goals are being financed and what rules shape financing
Section S.1 What are systems?, which explains what a system is, the importance of systems boundaries, the difference between open and closed systems and the importance of systems thinking
Section S.2 Systems thinking patterns, which outlines the core components of systems thinking: distinctions (thing/other), systems (part/whole), relationships (action/reaction), and perspectives (point/view)
Learning objectives:
discuss how states can finance regenerative activities through taxation, borrowing, and money creation
In 2020, the world changed almost overnight. Shops closed, schools moved online, and hospitals filled with Covid-19 patients. Millions lost their jobs. To stop economies from collapsing, the UK, USA, Japan and the EU spent vast amounts of money on healthcare and income support. They did not wait to collect taxes. Instead, they created hundreds of billions of new pounds, dollars, yen and euros, just by typing numbers into a keyboard. One economist called it ‘the closest thing we have to magic.’
If states can find money during a crisis, why do we so often hear that there is none for social programmes or the climate emergency?
Figure 1. Both national and commercial banks can create new money quickly and easily in their digital systems.
(Credit: Wilfried Wende, Pexels license)
How can states raise the money needed for regeneration?
How can states raise the money needed for regeneration?
Every country depends on public spending to keep society and the economy running. States pay for hospitals, schools, housing, transport, energy, care and social protection, the services that make life possible and allow households, markets and commons to function.
In the decades ahead, the state’s role in leading regeneration will be large. It must meet basic needs while guiding the economy away from extraction and towards strengthening social and ecological systems. Much of this work will not bring the profits private investors expect, so public finance must take the lead.
States have four main ways to raise money: collecting taxes, borrowing, receiving transfers or loans from international organisations or other states, and creating money.
Taxes
Taxes
Taxes are payments from people or organisations to the state. There are many types: on income, sales, property, inheritance and profits. Taxes fund essential services and can influence fairness and behaviour.
Taxes on harmful products such as tobacco or petrol can reduce production and consumption of damaging goods. Taxes on large inheritances or capital gains can slow the reinforcing feedback loops that widen economic inequality. Progressive taxes ask those with greater wealth and income to contribute more to the common good.
Many people support higher taxes on the very wealthy and on large corporations because these groups have benefited most from economic growth while contributing proportionally less to social welfare. Well-designed systems make it difficult to hide wealth or shift profits abroad and ensure that everyone pays their fair share.
Designing fair taxes can be complex. Policies that seem environmentally or socially responsible can still deepen economic inequality if they ignore people’s circumstances. When France raised petrol taxes to cut fossil fuel use, many lower-income rural residents protested because they had few transport alternatives (Figure 2). The lesson is that effective taxes must support ecological goals while protecting social justice.
Figure 2. The gilet jaunes protesters angry about the unequal impact of petrol taxes, demanding a just climate transition.
(Credit: Thomon, CC BY-SA 4.0)
Borrowing
Borrowing
A budget deficit occurs when a state spends more than it collects in taxes; a budget surplus is the reverse. To cover a deficit, states borrow by selling bonds, promising to repay with interest. The total owed is the national debt, often compared with national income as the debt-to-GDP ratio (Figure 3).
Borrowing does more than fill budget gaps. Government bonds can provide a safe place for savers such as pension funds, to hold money over long periods. Borrowing enables states to smooth out spending across years when the economy is weak and tax revenues are low. It also supports long-term investment in infrastructure and climate action.
Many people fear that high debt will burden future generations. Credit rating agencies, private firms that judge risk, may downgrade a country, making borrowing more expensive and pushing states to cut spending. When such warnings discourage investment in people or nature, they can hold back regeneration rather than protect stability.
Worries about the national debt matter most for countries that borrow in foreign currencies, such as US dollars or euros, or rely heavily on global investors. These states must repay their debts in a currency they do not control. If the value of their own currency falls, their debts become harder to repay because it takes more local money to buy the foreign currency they owe. Investors may also lose confidence if they fear inflation, political instability, or a weaker exchange rate. To attract them back, states often have to raise interest rates, which makes borrowing more expensive and can slow the economy.
Countries that issue and borrow mainly in their own currency face different conditions. Their governments and central banks can usually keep borrowing costs stable because they can create or buy their own bonds when needed.
What matters most in these cases is how debt is used and who holds it. Japan shows this clearly. It has one of the world’s highest debt-to-GDP ratios yet very low interest rates, because most of its debt is held domestically in yen.
Figure 3. Government debt compared to GDP, expressed as a ratio (debt/GDP).
(Credit: Visual Capitalist, using data from the IMF 2025 World Economic Outlook)
Transfers or loans from international organisations or other states
Transfers or loans from international organisations or other states
States also move money through international cooperation. Some receive loans or grants from institutions such as the World Bank, the International Monetary Fund (IMF) or regional development banks. Others share funds through programmes like the EU’s Green Deal. These transfers can help countries invest in development or climate resilience, though they often come with conditions about how money must be used. Later in Section 6.3 we explore how such rules might be redesigned for regeneration.
Creating money
Creating money
States have one more powerful way to finance their work: they can create money. This strategy is often overlooked because many politicians and journalists still compare state budgets to household budgets. Households must earn or borrow before they spend, but countries that issue their own currency have a special ability called monetary sovereignty.
A country has higher monetary sovereignty when it (among other factors):
issues its own currency;
borrows mainly in that currency;
has a central bank that can create money and work with the state to manage spending and interest rates.
Countries such as the UK, Japan and the USA have strong monetary sovereignty, while others operate with more limits (Figure 4). Even countries with high monetary sovereignty have to consider exchange rates, trade balances, and political choices that affect confidence when considering whether to create money to finance regenerative activities.
Figure 4. Monetary sovereignty, and therefore the ability of states to create money for regenerative actions, differs among countries for a variety of reasons.
Modern Monetary Theory
Some economists, working in a school of thought called Modern Monetary Theory (MMT), offer a different view of how sovereign states finance themselves. MMT argues that a state with its own currency cannot run out of money like a household can. The real question is not “Where will we find the money?” but “Do we have the people, tools and materials to do the work?”
When resources are available, states can create new money to employ them. The central bank would credit state bank accounts to pay for goods, services or wages. Later, the state can withdraw money from circulating in the economy through taxes or bond sales to control inflation. In this way, money creation can use idle resources to meet shared goals.
MMT does not claim that states can spend without limit. The real constraint is inflation, which occurs when spending grows faster than the economy’s capacity to produce goods and services. Inflation also depends on supply chains, import prices and expectations about the future. Taxes, planning and resource management are therefore essential for stability.
During Covid-19, many gstates proved they could mobilise vast amounts of money when lives were at risk. The same understanding could guide investment in climate action and social care, if spending expands productive and ecological capacity rather than fuelling prices or speculation.
In practice, how states use this power depends on the fiscal rules they set, the independence of their central banks, and the political choices made about what counts as responsible spending. Many states underuse the money creation tool because they believe they must ‘balance the books,’ even when workers and materials sit idle. By treating the state like a household, they limit the very power that could fund affordable housing, renewable energy and care systems. Not all economists agree with MMT, but it raises important, and urgent, questions about how public money could drive regeneration.
States without monetary sovereignty
Some countries do not fully control their own money. For example, Ecuador uses the US dollar, and members of the eurozone share the euro, which is managed by the European Central Bank. Other countries borrow in foreign currencies such as dollars or euros that they cannot create themselves. When this happens, to repay their debts, the countries must earn or trade for those currencies. usually by exporting goods. This makes them more vulnerable to changes in global markets and limits how freely they can invest at home. Because global finance and trade is organised around a few dominant currencies like the US dollar, many countries do not have the power they need to shape state financing.
Figure 5. When other countries take loans in U.S. dollars, they restrict their monetary and wider economic sovereignty.
(Credit: Paweł Kacperek, licensed from Adobe Stock)
MMT thinkers and other economists call for cancelling unjust debts, creating regional public banks that lend in local currencies, and reforming international rules so all nations can invest in health, education, care and climate resilience. These ideas will be taken up again in Section 6.3.8 and Section 6.3.9.
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Understanding how public money is created changes what people imagine is possible. States with monetary sovereignty can invest directly in people and planet, funding housing, renewable energy, transport and education to build resilience instead of reacting to crises.
Inflation is a risk if state spending outpaces the resources we have to produce what we need. But it may be more dangerous to do too little while the climate warms and inequality deepens. When used with care, democratic oversight and long-term vision, public finance can become one of the strongest tools for building economies that meet human needs within planetary boundaries.
6.3.6 Activity
6.3.6 Activity
Concept: Systems, regeneration, power
Skills: Thinking skills (critical thinking)
Time: 30-40 minutes
Type: Individual, pairs, and/or group
Reflection on state financing narratives
Narratives about government spending are powerful. Politicians, media, and economists often repeat familiar narratives about how states should manage their budgets. Some compare governments to households that must ‘live within their means,’ while others argue that what matters is a country’s real capacity to act. Here are two famous quotes by John Maynard Keynes and Margaret Thatcher.
Figure 6. John Maynard Keynes, British economist and government advisor in the 1930s-40s
(Credit: Wikimedia Commons, public domain)
‘Anything we can actually do, we can afford.’
John Maynard Keynes (1942)
Figure 7. Margaret Thatcher, UK prime minister 1979-1990.
(Credit: Rob Bogaerts, Nationaal Archief, CC0)
‘The State has no source of money other than money which people earn themselves. If the State wishes to spend more it can do so only by borrowing your savings or by taxing you more. There is no such thing as public money; there is only taxpayers’ money.’
Margaret Thatcher (1983)
Read the quotes and think about what each quote is saying about how states can or should spend money. Write your ideas or find another way to record them.
What does the speaker mean? How does each speaker view the state?
What assumptions are they making about how state finance works?
Based on what you have learned in this section, how true do you think the statement is? Why?
You could bring in ideas from Section 5.1.5 State narratives: Neoliberalism and Section 5.1.6 State narratives: Entrepreneurial state, if you have covered those.
Share and discuss your reflections with a partner or in a small group.
Class discussion or written conclusion.
As a class, discuss which statement feels more accurate and/or useful for understanding today’s challenges.
Or you could write a short paragraph summarising:
To what extent do I agree with each statement, and why?
Ideas for longer activities and projects are listed in Subtopic 6.5
Checking for understanding
Checking for understanding
Further exploration
Further exploration
Finding the Money - A documentary on Modern Monetary Theory (MMT). Available for free in US/Canada available on YouTube. Otherwise available for purchase or rent from other online providers (see website). Difficulty level: medium
SystemShift Podcast Episode 2 - A podcast with Ann Pettifor, an economist, writer, and activist. She explains how money is created and shares her insights into the problems plaguing the world's monetary system. She also argues that governments must regulate the finance sector in the interests of society and the ecosystem. Difficulty level: medium
Wray, L. R. (2023). Money for beginners: An illustrated guide - add description of the book
Sources
Sources
Kelton, S. (2021). The deficit myth. John Murray.
Mazzucato, M. (2021). Mission economy: A moonshot guide to changing capitalism. Allen Lane.
Olk, C., Schneider, C., & Hickel, J. (2023). How to pay for saving the world: Modern Monetary Theory for a degrowth transition. Ecological Economics, 214, 107968. https://doi.org/10.1016/j.ecolecon.2023.107968
Pettifor, A. (2017). The production of money. Verso.
Raworth, K. (2017). Doughnut economics: seven ways to think like a 21st century economist. London: Penguin Random House.
Wray, L. R. (2022). Making money work for us: How MMT can save America. Polity Press.
Wray, L. R. (2023). Money for beginners: An illustrated guide. John Wiley & Sons
Terminology
Terminology
economy: all the human-made systems that transfer and transform energy and matter to meet human needs and wants
tax: payment from individuals or organisations to the government, used to provide public infrastructure and services
state: a system that provides essential public services, and also governs and regulates other economic institutions
energy: the ability to do work or cause change
care: the act of providing what is necessary for the health, welfare, upkeep, and protection of someone or something
household: a system where people living together care for each other and do domestic work, often termed the 'core economy'
market: a system where people buy and sell goods and services for a price.
commons: a system where people self-organise to co-produce and manage shared resources.
regeneration: restoring and revitalising something
extraction: taking something away from somewhere else, especially using effort or force
system: a set of interdependent parts that organise to create a functional whole
profit: total revenue minus total cost
investor: an individual that puts money into an entity such as a business for a financial return
finance: to provide funding for a person or organisation
loan: a sum of money that an individual or group borrows from banks or other financial institutions
income: money received from work or investments
inheritance: the assets that a person leaves to others after they die
consumption: using resources and products to meet needs
capital gains: profits made when assets are sold for more than they were bought for
reinforcing feedback: a situation where change in a system causes further changes that amplify the original change which can lead to tipping points in a system
economic inequality: unequal distribution of income and opportunity between different groups in society
progressive tax: a tax in which the tax rate increases as the taxable amount increases
wealth: the total value (stock) of someone’s assets such as money, house, or investments
corporation: a large business or company that is treated by law as a single organisation, separate from the people who own it
economic growth: an increase in the total value of goods and services produced in a period of time
social welfare: state programs supporting people to meet their basic needs, including supplemental income, food, housing, health care and other services
fossil fuel: a non renewable energy source including coal, oil, and natural gas, formed over millions of years in the Earth's crust from decomposed plants and animals
budget deficit: when a government spends more money than it collects in taxes
budget surplus: a situation where state income is higher than its spending
bond: a financial tool where an investor lends money to a government or company in return for regular interest payments and repayment of the original amount
interest: the price a borrower pays to borrow a sum of money
national debt: the total amount a government owes from past borrowing
debt-to-GDP ratio: a comparison of a country’s public debt to the size of its economy
pension fund: a fund that collects savings during people’s working lives and invests them to provide income after retirement
tax revenue: money collected by a government from individuals and organisations used for public spending and investment
investment: money spent for the enhancement of human or physical capabilities
infrastructure: large scale physical systems that a society needs to function (roads, railways, electricity networks, etc)
credit rating agency: a business that assesses how risky it is to lend to a company, city, or country and assigns a score that affects borrowing costs
currency: a system of money in general use in an area
inflation: a rise in the general price levels of an economy over time
exchange rate: the price of one currency in terms of another
World Bank: an international financial institution that provides loans and grants to the governments of low- and middle-income countries with the goal of reducing poverty
International Monetary Fund (IMF): an agency of the United Nations responsible for the financial stability of the global monetary system
development bank: a state or mission-driven bank that finances long-term social and economic development
transfer: to move something from one place to another
resilient: able to recover after a disturbance
monetary sovereignty: a state’s ability to issue its own currency and spend without relying on foreign borrowing
Modern Monetary Theory (MMT): an approach to public finance that explains how governments that issue their own currency can fund spending by creating money through the central bank and public budgets, with real resources and inflation as the main limits
sovereign state: a country with authority over its laws, currency, and public spending
central bank: the main bank of a country (or group of countries) that manages money, interest rates, and financial stability
wage: payment for work
supply chain: the sequence of processes involved in the production and distribution of a product
import: bringing goods or services from another country into your own country to buy and use.
speculation: making money by betting on price changes in assets, rather than investing in activities that meet real human needs
fiscal rule: a state policy that sets formal limits on public spending, borrowing, or deficits, often written into law or budget frameworks
renewable energy: energy from sources that are continuously available or regenerate quickly
Eurozone: the group of European Union countries that use the euro as their currency
trade: to exchange something for something else
export: send products to another country for sale
power: the ability to influence events or the behaviour of other people
public bank: a bank owned by the state or a public body that lends with social or ecological goals rather than private profit
democracy: a system of governing which depends on the will of the people
planetary boundaries: a model that illustrates these nine Earth systems and their limits
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