Thursday, July 19, 2012

An ancient Greek approach to modern economics

by Samuel Brittan

Financial Times

July 19, 2012

According to the classical Greek authors, political change was subject to a recurrent cycle. We start with tyranny, which was overthrown by what was then called democracy. The notorious fecklessness of “the people” led the system to harden into an oligarchy, which mutated into tyranny again, leading to unacceptable burdens and thus a new democratic revolt; and so the whole cycle would begin again.

A comparable cycle, equally stylised, can be discerned in modern economic policy, whether at the level of an individual country or the community of industrial nations. We start with economic expansion, which rightly or wrongly is regarded as getting out of hand. Sometimes there is the threat of inflation, or alarm at budget deficits, or worry about the pace of credit expansion, and sometimes an exchange rate link looks wobbly. Often it is a combination of some or all of these.

The second stage is one of fiscal or financial austerity. This often disappoints, as the adverse effects on output and employment can come through well before the financial variables have stabilised. In the worst cases the slowdown in economic activity and employment may for a time cause budget deficits to widen. A call goes out from respectable sources, such as organised business, the official opposition and even the government’s political supporters, to “go for growth”. Heads of government then lean on their finance ministers to do just that: which in practice means attempts to stimulate demand without adding fiscal red ink. Examples are guaranteeing some investments or bank loans. But these may not do the trick in the absence of buoyant consumer demand. At first surreptitiously, and then more and more openly, the squeeze is eased, consumer demand stimulated and off we go on to the next boom.


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