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."
- Sir Keith Joseph (1979), Margaret Thatcher's mentor.
"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."
- Professor Charles Goodhart, Chief Economic Adviser on Monetary
Policy, Bank of England 1980-1985
"[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."
- Mrs Thatcher, February 1985
"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."
- Professor Charles Goodhart, Chief Economic Adviser on Monetary
Policy, Bank of England 1980-1985
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?"
- Professor Alan Budd, Economic Adviser to the Treasury 1970-1974,
1979-81; interviewed June 1991 when economic adviser to Barclays
Bank.
© 1997 Keith Rankin
{ This document is: http://www.oocities.org/Athens/Delphi/3142/krf36-pandora.html
( viewings since 28 Dec.'97:
)