The problems with economic theory

Many economists and politicians become obsessed with a particular theory and lose sight of reality. Too often, economists are trained in the theories of monetarism or government intervention and reject alternatives. They do not like change.

However, the very nature of the competitive economic models on which modern society is based causes constant change. One country finds a way to increase its productivity or invents a new technology and the others are left behind. For the losers it is then necessary to develop new ways to increase their own prosperity, either through increases in productivity or invention of their own new technologies. The competitive economic models decree that there are always winners and losers but they swap and change as they become more or less competitive.

With that ebb and flow comes the need to adapt economic theory to suit the prevailing conditions; by rejecting a particular economic theory, the intransigence of economists and politicians condemns their country to stagnation and demise.

For an economy that is stagnating it is important that government intervenes and increases investment. As the economy improves, private companies take over, government intervention can be decreased and the cost of intervention can be recouped as increased revenue leads to increases in tax revenues.

Over time, the economy inevitably becomes overheated and inflation increases. The need then is for monetary policy to steer the economy, preferably without causing a drop in investor confidence. If confidence drops, investors take flight and the economy begins to deflate or stagnate.

Now, it may be that monetary policy has not caused the reduction in confidence but that the prevailing world economic situation has changed. If monetary policy is not eased correspondingly, further deflation or stagnation results. Eventually a complete reversal is required and government intervention becomes imperative once again.

Similarly, too much government intervention, or an inability to recognise changes in the global economy requiring a change to monetary policies, can cause private investors to scare and deflation and stagnation again results.

The art of economic management lies in being able to recognise and respond to internal and external changes. Obsession with a particular economic theory means that the economy is damaged unnecessarily, a cure not being forthcoming until there is a change in government.

Britain is particularly affected by economic intransigence. It has always produced a plethora of inventors and those willing to risk their money for economic reward in the middle or long term but this has, especially in the last thirty or forty years, been severely damaged by the inability of economists and politicians to adapt to changes in the global economy. This has resulted in a severe loss of confidence and the emergence of short-termism in the minds of investors and business leaders. Politicians try to blame others but the truth is that they are wholly to blame. It is not the fault of one political party; it is the fault of all politicians, no matter what their political inclinations.

So what has changed in recent years that is so damaging? In the past there was one saving grace, the length of a political term. Four years was insufficient time for a particular economic theory to cause lasting damage. However, in recent years there has been a tendency for political parties to remain in office for two or three terms and the extension of the political term to five years bodes ill for the long-term future of the British economy.

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