The Rankin File: #36



Monetarism & Keynesianism: Fables
from the Age of Science?

Friday 5 December 1997

Monetarism is a pseudo­scientific ideology that not only claims inflation is the root cause of all economic evil, but also believes it has a simple solution. That solution doesn't work. Monetarist policies made inflation worse. Nor was the Keynesian technocratic solution practised in the 1960s an adequate answer to the economic problems addressed by economic policy: how to achieve efficient resource allocation and maximum sustainable per capita economic growth.

New Zealand's experience was the same in the 1980s. "Anti­inflation" policies turned out to be pro­inflation, anti­tax and anti­labour. Monetarism turned out to be a Trojan Horse for unrepentant capitalist excess.

The remaining text is composed of excerpts from the Pandora's Box documentary "A Fable from the Age of Science", BBC World 1992:

Introduction

"For the last 30 years politicians in Britain have tried to build a new prosperity. They wanted to make an old nation that had fallen behind in the world recapture the glories of its past. They turned for help to what they believed was a science of money. One after another Labour and Conservative governments became convinced that if they followed what they thought were a set of scientific laws, the economy would grow faster; the perceived tide of decline could be reversed. But instead of restoring the country's economic fortunes, Britain's economic experiments failed to halt Britain's decline. This is the odd story of how politicians came to believe there was a technical way to make Britain great again."

Thatcher's Monetarism

"As with the [Keynesian] National Plan [of the 1960s], [Thatcherite economics] was all very simple. The supply of money was to be reduced by raising interest rates and cutting public spending. Inflation would fall and enterprise flourish. Instead of putting money in, as Labour had done 15 years before, this time the theory said it should be tightly controlled."
"There arose a slightly messianic sense of mission."

"But the economy did not behave in the way that monetarists predicted. The squeeze on money led to a wave of factory closures while inflation continued to rise. ... Even more mystifying was the behaviour of the money supply. Despite the squeeze it was still growing, something the monetarists thought impossible."

"Well it was all a bit embarrassing for people like me who were at the Bank of England, because we'd been forced errh government had signed up for this path of gently declining monetary aggregates. But instead of the aggregates gently declining, some 5 or 6 months after this new policy was put into operation they took an enormous jump, and it was very difficult to know why, and what was to be done about it."

"[In 1981] unemployment headed towards two and a half million. Inflation did begin to fall, but the money supply continued its mysterious rise. It became clear that the fundamental law of monetarism - the relationship between the money supply and inflation - didn't work. Ever so quietly, this solution to Britain's problems was discarded."

"Let me just have a word about monetarism and monetary control first. You all know full well that if you produce too much of something its value will fall; that's elementary. It isn't a new fangled theory; it is as essential as the law of gravity and you can't avoid it."

"It's not a doctrine to which I've ever subscribed; It's one which I think actually came in with Milton Friedman; I used to read about it; it's a theory to which I have never subscribed."

"Some of those who had lived through the experiment now became deeply pessimistic. One economist saw it as proof that it was fundamentally impossible to change in a predictable way how an economy behaved. As in other sciences, his observation had a formal name: Goodhart's Law."

"Goodhart's Law said that if ever the Government decides to rely on any particular statistical relationship as a basis for policy, then, as soon as it did that, that relationship would fall part. And that's just what happened."

Afterword

"For some economists who were involved in this story there is a further question: were their theories used to disguise political policies that would have otherwise been very difficult [to sell] in Britain?"
"The nightmare I sometimes have about this whole experience runs as follows: I was involved in making a number of proposals which were partly at least adopted by the government and put in play by the government. My worry is as follows; that there may have been people making the actual policy decisions, or people behind them, or people behind them, who never believed for a moment that this was the correct way to bring down inflation. They did however see that this would be a very very good way to raise unemployment.
      And raising unemployment was an extremely desirable way of reducing the strength of the working classes; if you like, that what was engineered there - in Marxist terms - was a crisis of capitalism which recreated the reserve army of labour, and has allowed the capitalist to make high profits ever since."

© 1997 Keith Rankin

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