It has often been said of economics that while the questions remain the same, it is only the answers that change. The obscure Victorian economist, Thomas Carlyle, described economics as a ‘dismal science’. We venture he was wrong; it’s not a science at all. While I have a degree in the subject, I realised long before I graduated that economics fell far short of the rigour associated with natural sciences. It was a pale imitation of mathematics or chemistry and …. er …. light years away from physics. In truth, it’s an imposter. Upon graduation, I felt a bit of a fraud although it was a comfort to know that as I was to receive my degree from Baron Wilson of Rievaulx, I might not be entirely alone; he had studied economics, too.
Economics, like hemlines, has its own cycle of fashion. In the post war period, the interventionist ideas of British economist, John Maynard Keynes, successfully challenged the established orthodoxy of neo-classical economics. The latter relied on market solutions but Keynes argued that governments were able to use a combination of deficit spending and low interest rates to counteract the negative effects of the business cycle. By the late 1970s, Keynesian orthodoxy was being supplanted by monetarism and the ideas of Milton Friedman. However, in the wake of the financial crisis, the wheel has turned full circle with fresh interest returning to Keynesian deficit spending.
Now, there can be no doubt that Keynes was a brilliant man and not only in the field of economics. There is also some logic in his beliefs that markets are not as faultless as many from the neo-classical school would have us believe. At the margin, deficit spending in a traditional cyclical recession can help stabilise falls in output and inject confidence. However, while the economy can be aided by the government, the government cannot become the economy. If it really were that simple, there wouldn’t be any major downturns. Even a politician should be able to understand that.
It is a natural corollary of Keynesian economics that if you spend money you haven’t got in the bad times, you need to save money you have in the good times. But here lies the problem; while the economy was laying golden eggs, politicians forgot the last bit of the equation. The UK was impersonating Old Mother Hubbard long before the financial crisis erupted.
This country’s finances are close to breaking point. To put the current situation into perspective, it took the UK until 1997 to amass a national debt of £350bn. Thirteen years later, it has more than doubled and almost unbelievably, is set to double again over the next five years, unless radical action is taken. Yet, all too many politicians and economists still use mealy mouthed language about prematurely withdrawing the economic stimulus and protecting the recovery. In our view, cockney rhyming slang would be a better language; the vast majority of them would effortlessly qualify as central bankers.
John Newsome can be contacted on: 01423 705123 or email:john.newsome@williams-im.com
