It may happen someday that computers will become so fast and
powerful they will be able to scan all that is written in any language about a
given subject such as economics, and extract the celebrated theories underlying
the basis upon which each text stands, and the heretofore unknown theories as
well. The importance of this last part is that the bulk of what causes the
world to go round is probably due to those uncelebrated, unknown or little
known theories. And the researchers running the project will be surprised to
learn that there exist as many economic theories and tools to work with as
there have been people writing about the subject.
The truth is that there is no such thing as an ideal
economy; one that will work for the proverbial “all seasons.” It is that every
move made by a human being contributes to the economy of his or her
surroundings either positively or negatively, and adjustments must be made all
the time to take the ensuing changes into account. And here is the big
surprise, every move made by the domesticated animals on the farms of the
planet also have an impact on the local economies. And if you want more, there
is more. In fact, the local weather and the geological occurrences that
happened millions of years ago have an impact on the current economies as well.
We must conclude from the above that if there is one
overarching theory which pleases one ideological group or another such as the
followers of John Keynes or Milton Friedman, it is because these groups have
looked inside the box, have recognized only a small number of the tools in it,
and have associated them with the theory which seems to the group as being
compatible with the tools it was able to identify.
But we must never forget that the ancients too have built
magnificent economies such as those of China ,
India , Persia , Egypt ,
Rome and Arabia .
There are also the various European nations that developed unique economies
based on the Industrial Revolution. Yet none of the ancient civilizations or
the early industrial nations had been exposed to the theories of Keynes or
Friedman. And this says that there is more to an economy than the fiscal and
monetary tools we keep referring to when speaking of the economy.
This brings us to the article written by George Osborne who
is Chancellor of the Exchequer in the United Kingdom . The article has the
title: “What the Economic Pessimists Are missing” and the subtitle: “The
recoveries under way in the U.S.
and especially in the U.K.
are a repudiation of 'secular stagnation.'” It was published in the Wall Street
Journal (WSJ) on April 11, 2014.
Given his position in the British government, the
preoccupation of Mr. Osborne has been the economic recovery of the country
after the difficult times it was made to suffer during the past few years …
along with most other advanced economies. That includes the economy of the United States ;
the largest in the world, and the one having a noticeable impact on everyone
else. In Britain ,
Osborne followed a policy he calls fiscal consolidation which he claims has
worked contrary to what the pessimists had been predicting.
Osborne whose WSJ article was based on a speech he gave at
an American think tank was not satisfied with only taking a victory lap; he
wanted to accomplish the bigger task of responding to the same pessimists whom,
he says, have developed new gloomy arguments. In his words: “They say that we
in the UK and the US face a
period of 'secular stagnation.'” And so he wished to dispel the notion that:
“free markets are no longer engines of progress, and more government spending
is the answer.”
We see, therefore, that the speech is but another episode in
the battle between the followers of Milton Friedman of which he is one, and the
followers of John Keynes whom he regards as being pessimistic. And the way he
describes how his efforts in the UK have gone, you would think they
boiled down to simply having to make a choice between one of two possible
tools. It was either the use of monetary policy which he favored, or the use of
fiscal stimulus which he did not.
In any case, to prove how correct he was and why he
succeeded, he set out to explain how he turned things around in Britain . He
said that “monetary policy … can work, but with two caveats. Banks need to be
well capitalized … And fiscal policy must be credible.” This done, he did what
politicians do which is to beat his breast, and joyfully run the victory lap
displaying the flag of a glowing economy. How glowing? Well, it has “grown
faster than any in the G-7,” he said. He then tossed a few more sparkling
statistics that must have rendered his audience dizzy.
And he drew the usual conclusions: (1) fiscal consolidation
and economic recovery go together, (2) the notion that the link between living
standard and economic growth has broken, will be proved wrong, (3) the
legitimacy of the free-market system depends on the promise that effort is
rewarded, (4) We must make sure that work pays by cutting taxes on work and
reforming welfare, (5) reduce business taxes and regulatory barriers.
All these measures being associated with the Friedman school
of good economics, he ends by attributing the British successes to the efforts
of the Conservative Party now governing Britain . And despite the fact that
these days, the American government is considered to be anything but
conservative, he leaves his audience with a parting shot that seems a bit odd:
“Our nations' best days lie ahead.”
Let's now take a close look at what he says he did to cause Britain 's
success. He says that the monetary policy he followed had two other provisions
working with it: Banks were well capitalized, and Britain 's fiscal policy was
credible. Really? This is puzzling because it suggests that the printing
presses of the central bank were kept busy – a Keynesian notion at odds with
the fiscal consolidation he says he pursued.
That mystery is deepened further by the revelation that
instead of the government doing the spending of the money, the banks received a
portion of it, and another portion was used by God knows who for the purpose
of: “supporting large infrastructure investments in roads, rail and energy …
protect science spending.” As well, make sure that Britain has the best schools,
skills and science in the world. Is he suggesting that all this was done
without government involvement?
No matter which way you analyze what the Chancellor was
saying, you'll find that the celebrated economic theories of Keynes and
Friedman played a small role in the economic recovery of Britain . If not
either of these two, it must be that Osborne instinctively used a combination
of tools he may or may not have been aware of to make things go round for Britain .