Sunday, 26 October 2008

Monetarists emerge from the caves

With the policies that they support having brought the world to the brink of economic and financial catastrophe anyone who believes that the world is ruled by rational thought might have imagined that the monetarist economists who supported Reaganism and Thatcherism would have donned sack cloth and ashes and were presently admitting their error and were doing public penance. Not at all. In the Sunday Telegraph 16 members of the economist stone age emerge to demand continuation of the policies that have produced the greatest financial catastrophe in almost a century. Their views are worth recording in full:
'Keynesian over-spending won't rescue the economy'
'Further to your interview with Alistair Darling, we would like to dissent from the attempt to use a public works programme to spend the country's way out of recession. It is misguided for the Government to believe that it knows how much specific sectors of the economy need to shrink and which will shrink "too rapidly" in a recession. Thus the Government cannot know how to use an expansion in expenditure that would not risk seriously misallocating resources.
'Furthermore, public expenditure has already risen very rapidly in recent years, and a further large rise would take the role of the state in many parts of the economy to such a dominant position that it would stunt the private sector's recovery once recession is past.
'Occasional slowdowns are natural and necessary features of a market economy.
'Insofar as they are to be managed at all, the best tools are monetary and not fiscal ones. It is inevitable that government expenditure and debt naturally rise in a recession but planned rises in government spending are misguided and discredited as a tool of economic management.
'If this recession has features that demand more active fiscal policy, which is highly disputable, taxes should be cut. This would allow the market to determine which parts of the economy shrink and which flourish to replace them.
'Dr Andrew Lilico, Europe Economics; John Greenwood, Chief Economist, Invesco; Richard Jeffrey, Cazenove Capital Management; Dr Ruth Lea, Economic Adviser, Arbuthnot Banking Group; Trevor Williams, Chief Economist, Lloyds TSB Corporate Markets; Dr Nigel Allington, University of Cambridge; Prof Philip Booth, Institute of Economic Affairs; Prof Tim Congdon, Author, Keynes, the Keynesians and Monetarism; Prof Laurence Copeland, Cardiff Business School; Prof Kevin Dowd, University of Nottingham; Prof Kent Matthews, Cardiff Business School; Prof Alan Morrison, Said Business School; Prof Sir Alan Peacock, Former Chief Economic Adviser, Dept of Trade and Industry; Dr Mark Pennington, Queen Mary College, London; Prof David B. Smith, University of Derby; Prof Peter Spencer, University of York'
The response to such neanderthal economics is simple. Interest rate cuts and tax cuts in no way guarantee that demand will be kept up to avert the fall in investment which most powerfully drives a recession. As Keynes put it, it is like 'pushing on a piece of string'. Only direct state investment and spending will ensure that extra demand is generated.
Certainly the monetarist economists are right that this will lead to an increase in the weight of the state in the economy. But that is exactly what is required in the present situation as the fundamental way to ensure that investment is maintained.
The monetarist economists' view that 'Occasional slowdowns are natural and necessary features of a market economy' has nothing to do with the present situation. Due to Reaganism and Thatcherism we are faced with the potential of a depression/disintegration of the financial system, not a cyclical downturn.
They spell out their Tory/capitalist dogma by writing of the danger that: 'the role of the state in many parts of the economy [would rise] to such a dominant position that it would stunt the private sector's recovery once recession is past.'
Their dogma, in other words, is that that the private sector must maintain its dominant position - not that the economy should recover. At present. only the expansion of the state's role in the economy can best ward off or minimise recession through guaranteeing the continuation of investment. The monetarist economists prefer to maintain the dominant role of the private sector no matter what the damage to the economy.
The monetarists should retreat to their incoherent economic caves. Neither ordinary people nor the economy can afford their obsession with the private sector.

1 comment:

Bemused Economist said...

As an amateur anthropologist, I think it's a little unfair on neanderthals to equate them with economics this backward. I think 'dinosaur' is closer to the mark.