Saturday, 28 September 2013

Economics Fundamentals - the 19th C versus the 20th

In economics we're used to outlining the key government objectives - low unemployment, low inflation, balanced budget, healthy current account, and economic growth (to which a healthy environment can be added).

These are not bad values for a country to possess - after all, who wants high unemployment and inflation, a deficit careering out of control, a depression and an environmentally poisoned environment?

That they are considered key government objectives though is a recent phenomenon - a twentieth century phenomenon in fact born from socialist and social engineering ideas that governments could and should direct their countries economically, and that the economies would respond accordingly.

Now those in power have always enjoyed directing their people - pushing, cajoling, forcing, encouraging them to do as the kings, princes, and technocrats wish, but historically that has generally meant getting the people to wage wars against the neighbours and build massive monuments, walls, and castles (because of retaliation), or white elephant projects such as large monuments. Only recently have governments sought to control the economic reins and imagined that they could turn a few dials and achieve economic nirvana. It's more likely been hell.

In the nineteenth century government policy regarding the economy was one of laissez-faire; generally speaking that is - look at any historical period in more detail and you'll find the picture is much more complicated. In that century governments did not set economic targets (and did not even entertain the notion that they should); targets entered the picture in the interwar years and then dominated political economy after the Second World War following the Keynesian revolution.

Suddenly - that is in terms of human history - governments deigned to seize the economy and sought to direct it. In the UK this overarching policy was effected through nationalising the main industries and the formation of the welfare state. During the 1950s economists employed by the state (so we should really call them statists, people who see the state as the optimal tool for developing people and economies) thought they were doing a swell job and rebuilding Britain and directing its economy: they enjoyed low unemployment and inflation and economic growth. The PM, Harold Macmillan, famously said that the electorate "had never had it so good."

Really? Germany - demolished by the war - was overtaking the UK in economic growth: sure there was Marshall Aid, but more importantly was a return to a stable currency and free markets.

Macmillan's phrase began to haunt the British. Time taught us differently. The controls and manipulation of the economy gradually caused unemployment AND inflation to rise (STAGFLATION), economic growth to slow down, the current account to head negative, and the environment wasn't looking too pretty either. In the 1979, the UK had a Winter of Discontent.

Since that nadir, governments have deployed various policies to achieve their targets using privatisation and various policies to encourage trade. These have worked well (more or less) in freeing entrepreneurial activity, but still governments in the UK and the West remain wedded to the idea that they should be controlling the economy - indeed, that they have the power to do so.

It's worth recollecting Shelley's poem, Ozimandias:

I met a traveller from an antique land
Who said: `Two vast and trunkless legs of stone
Stand in the desert. Near them, on the sand,
Half sunk, a shattered visage lies, whose frown,
And wrinkled lip, and sneer of cold command,
Tell that its sculptor well those passions read
Which yet survive, stamped on these lifeless things,
The hand that mocked them and the heart that fed.
And on the pedestal these words appear --
"My name is Ozymandias, king of kings:
Look on my works, ye Mighty, and despair!"
Nothing beside remains. Round the decay
Of that colossal wreck, boundless and bare
The lone and level sands stretch far away.' 

The results are still dispiriting. Since 2007 the western economies have faltered into a dark, deep recession while their governments have actively debased their currencies: unemployment is tragically rampant across Europe and the States (and often undervalued by statistical manipulation); inflation is creeping up, and government deficits are historically massive.

That's Greece heading off the graph.

In the nineteenth century, there were no economic policies.

The government did not get involved in setting targets - and, guess what, unemployment was low, prices were actually falling (as productivity increased against a stable currency), and economic growth was pulling increasing numbers of people out of poverty.

But they don't tell you that in the textbooks.

The textbooks are implicitly or explicitly statist in orientation: the government, although critiqued well in some books, is still presumed to require the dominant role in people's lives. The authors take the world as it is and assume that it has always been like this. No, it hasn't and it doesn't need to be like this either.

For an overview of political philosophy see my Introduction to Political Philosophy.

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