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Simple solutions?

We are fast approaching the Tory government’s final Christmas. A government whose ministerial flux would have made Heraclitus blush. A government whose only constant has been virtuosic incompetence.

What, one wonders, have the present government’s motives been? At the heart of economic theory sits the idea that behaviour can be explained by underlying desires. Of course, desires and motives can’t directly be observed; you can’t peer into another person’s mind to see what makes them tick. Instead, we have to try to work back to desires and motives by looking at the way people behave. Perhaps the behaviour of the government over the past few years suggests a burning desire to be in opposition?

Yep, they’re toast.

OK, but what next? Specifically, which of the Tory’s economic policies should the incoming Labour government scrap, and which should they leave in place? Well, that’s easy isn’t it? All they have to do is to chuck out the policies that aren’t working… that’s if there are such beasts… and keep the policies that are.

That invites the question: How can we tell if an economic policy is working? Although there’s a plethora of mathematical techniques that purport to answer that question, even as an initiate I am sceptical. Once we’ve fought our way through the thicket of political rhetoric, we find the reality of policy appraisal is infested with ambiguities.

We’re stuck with ambiguity but, like the drunken uncle at a Christmas party, it tends to be ignored

What are they? Let’s state the obvious for a moment. An economic policy, like every other kind of policy, is introduced to achieve something. An anti-inflation policy attempts to bring inflation down, an unemployment policy aims to reduce unemployment, taxation policies may aim to improve “equality” or “fairness”.
In which case, isn’t it straightforward? To appraise the effectiveness of a specific policy, all you have to do is compare the target variable – the thing you’re trying to achieve – before and after the implementation of the policy.

Well, no.

For an economic policy to work, there has to be a causal link between policy tools and policy targets. And to descend into technicality for a moment, a causal link is always a theoretical postulate.

Eh?

What I mean is, as David Hume pointed out, you can’t see causality, you have to infer or postulate it. The money supply increases and, a few months later, prices start to rise. That’s an unambiguous correlation, but how can we tell if the increase in the money supply caused prices to rise?

This is an ancient question and, guess what? There still isn’t general agreement. For every economist who accepts a causal link between the money supply and inflation, there’s another who denies, or de-emphasises it.

The current inflation isn’t immune to such debates. There were some economists who warned at the time of the vast covid monetary expansion that inflation was sure to follow. This was based on the idea of a causal link between the supply of money and inflation.

Others, Paul Krugman for example, retrospectively argued that the current inflation was just the result of covid supply shocks and the Ukraine war. However, it’s interesting that Prof Krugman insisted inflation wasn’t coming, right up to the point it struck.

Watch out, the language of politics tends to corral us into attributing a single cause for every event, but this is simplistic. Indeed, the principal ambiguity in policy appraisal stems from the fact that every event has multiple causes. The idea that inflation is solely the result of monetary expansion; that such things as supply shocks can have no impact, is just silly. The notion that inflation is solely the result of supply shocks is even more foolish.

Politicians present their opponent’s failures as though they are the mistakes of an omnipotent being, a being who could have got it right but chose not to. However, when it comes to their own failures – well, these were due to circumstances “beyond our control”.

Keynes once said: “We have, as a rule, only the vaguest idea of any but the most direct consequences of our acts.” In other words, we’re stuck with ambiguity but, like the drunken uncle at a Christmas party, it tends to be ignored. Unfortunately, the currency of politics is a counterfeit certainty: complex problems are routinely presented as having simple, indeed obvious solutions.

But hang on a second, why does the other side insist on ignoring these simple solutions? Well, that’s simple too: they’re incompetent, or self-serving, or looking out for their chums, or just malevolent. Of course, ambiguity isn’t attractive. Its acknowledgement would inevitably lead to the cardinal sin of political rhetoric: “We’re not sure.”

How can we deal with ambiguity? We have to use the apparently vanishing skills of careful, dispassionate consideration, and the exercise of reasoned judgement rather than mere knee-jerk emotional reaction.

This is a serious issue. The long-term health of any democracy requires an electorate that’s able to think for itself. In the words of Stephen J Gould: “When people learn no tools of judgement and merely follow their hopes, the seeds of political manipulation are sown.”

Peter Lawlor was the Chief Economist at the German Stock Exchange and continues to advise senior politicians and Wall St institutions. These are strictly
his own views

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Columns, December 23 / January 24, On The Money

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