The model is broken. So therefore we have to understand
how the (broken) model really works and then everything will be fine. In
essence this is the nature of the current debate about the economy – no-one
really understands how the thing works and so, as we usually do when faced with
something large and inexplicable, we behave like the blind men and the elephant.
And so these men of Indostan
Disputed loud and long,
Each in his own opinion
Exceeding stiff and strong,
Though each was partly in the right,
And all were in the wrong!
Disputed loud and long,
Each in his own opinion
Exceeding stiff and strong,
Though each was partly in the right,
And all were in the wrong!
So it is with macroeconomics. Different sets of
economists stand over their models of the economy – each one more Heath
Robinson than the next – and argue that the results tickering out from the
machine tell us the right things to do. Raise interest rates here, increase
money supply there says one set of machine-minders.
Nooo! We hear another crew scream – more taxes, public
investment and perhaps a little dose of inflation. That will do the job. All
the while, over the wall the third crew say their combination of levers and
pulleys provides the only proven and correct system of economic management. And
so on along the line from Central Bank to International Body, from think tank
to accountancy firm and from college to university – each set of overlookers,
underlookers and sagger-maker’s bottom knockers proclaims that their results
are proof of how we can make the economy work better.
Every now and then – more by luck than through skill and
knowledge – one or other set of economists gets something right. For a moment
it appears that a particular combination of lever-pulling and knot-tying is the
way to run the economy. The leaders of the team receive great prizes, backs are
slapped and the Kings and Princes grant the machine-minders money. And all the
other teams, for a short while, shuffle into line by using the specified
combination of levers and knots.
All this is just a combination of hubris and sympathetic
magic. We witness the combining of the false belief that the economy can be “managed”
with the misplaced view that because when we pulled lever seven last Wednesday
and the ‘right’ result ensued, this will happen every time we pull lever seven.
The truth, of course, is that the pulling of lever seven and that ‘right’
result coincided because of mere happenstance.
There is an old shopkeeper saying – ‘look after the
pennies and the pounds will look after themselves’. It is the very antithesis
of all this self-confident macroeconomic legerdemain. Rather than trying to
design a great unifying theory of the economy (one of those Heath Robinson
machines), we might be better looking at the simple process by which value is
created. This has nothing to do with money, with central banks or with
government but everything to do with providing other people with benefits.
No, not the benefits that are cash entitlements paid by
government but the benefits that us advertising folk talk about. You know, the ‘sizzle
not the sausage’. We don’t buy things just because they are things, we want
them because of what they do for us – feed us, clothe us, shelter us, entertain
us, please us. There are no
macroeconomic policy levers here just people adding value by offering others
benefits and in doing so giving themselves the means to secure the value – the benefits
– they want.
All those economic model minders, all those predictors of
the economy, all those lever pullers seem oblivious to this simple idea of
value. They have become obsessed with money and the meaning of money, convinced
that if only the correct dragon’s teeth are sown takes the economy will thrive
and value will spring fully armed from out the ground. It seems to me that
these people are the inheritors of those priests and wizards who call on the
gods and magic to ensure that the sun rose in the morning and the crops grew in
the spring.
The economists and policymongers inhabit grand temples, are granted
the ear of kings and princes and are looked on in awe by lesser folk. But their
ideas contain only a little more truth or hope of future goodness than did
those of the old priest who said the corn must be planted on a full moon or
that the rains will come if the right dance was danced.
....
1 comment:
It seems sensible to believe that the provision of the essentials of life as inexpensively as possible frees people from the need to grovel in the dirt all day every day to survive. As one simple example, think about the difference between water being piped to your home and having to carry a water butt on you head for a couple of miles to get some water from a stream.
It is the free time thus created which permits time to be spent on elaboration. What form the elaboration takes is not very important.
Basic cheap food, basic cheap drink, basic cheap shelter, basic cheap clothing, basic cheap warmth, and, in the modern day, basic cheap energy should be what Government should be striving for. Provide those things and the macro-economy will look after itself. On the other hand, push up the cost of water, food, energy, etc, and people have less money and time to spend on elaboration. There is then a knock-on effect and the whole economy suffers.
Simplistic? Yes.
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