April 20, 2005


Apolitical economy: The end of boom and bust means the politics has been taken out of economics. How? (Anatole Kaletsky, May 2005, Prospect)

With the benefit of hindsight, we can see that the slogan which famously won Bill Clinton the 1992 US presidential election—"It's the economy, stupid"—marked the zenith of the political ascendancy of economics. While conventional wisdom still holds that Americans ejected the first President Bush in November 1992 because they were smarting from the after-effects of a mild recession, this kind of naive economic determinism had already been refuted in Britain. In April, John Major had been re-elected in the midst of the longest and most painful economic downturn in a generation. Back then, economic determinists could still defend their position by claiming that Major did not really win the 1992 election; it was John Smith who lost it, by threatening to increase by half the marginal tax rate on upper middle-class voters. Since the mid-1990s, however, the idea of economics as the dominant factor in British, American or European elections has become untenable, as in country after country economic and electoral performance have diverged.

The waning power of economics to decide elections since 1992 is first and foremost a function of the worldwide ideological transformation that began in 1989. This was the moment when the only alternative economic model to modern capitalism disappeared. The end of communism and the rottenness revealed in the heart of every communist regime destroyed the last remaining hopes among socialists of creating an economic system that was fundamentally different from capitalism. Of course, politicians could continue to disagree over differences in taxation or public finance, but it was almost impossible for any serious politician to question the bedrock principles of the capitalist economy: private ownership, competition and the profit motive.

At the same time as the only theoretical alternative to capitalism was self-destructing, another very practical change was happening in the nature of capitalism itself. From its earliest days, the political hegemony of capitalism had been marred by a seemingly incurable flaw—the booms and busts which seemed to get wilder and more unpredictable with each economic cycle. Today, this Achilles heel of the capitalist system, if not quite eliminated, seems to have been safely bandaged up.

The fact that Britain has been enjoying one of its longest ever periods of uninterrupted growth reflects not only the good husbandry of the Labour government and the competence of the Bank of England, but also some profound changes in the nature of market economics in the world as a whole.

The clearest reason for Britain's unaccustomed economic stability is the new approach to the management of fluctuations in demand and employment, which has been seen as the core problem of macroeconomics since Keynes wrote his General Theory in 1936. This new approach to demand management was led by the US and Britain, but has now become a worldwide trend. Only continental Europe is still moving in the opposite direction because of the institutional rigidities built into the eurozone.

Based on a long overdue synthesis between the monetarist obsession with stable prices and the Keynesian preoccupation with growth and employment, the new approach to demand management has kept the US and British economies very close to full employment and their long-term paths of growth trend. After decades of unproductive debate between Keynesians, who believed that business cycles could only be tamed with stimulative public spending, and monetarists, who insisted that using government borrowing to boost the economy would only produce inflation, it turned out that both sides were right—and wrong. A synthesis has emerged, in which active demand management plays a crucial role in stabilising the business cycle and sustaining growth, but in contrast to the old Keynesian approach, this stabilisation is performed by manipulating interest rates instead of public borrowing and spending. Moreover, the responsibility for managing demand now falls on an independent central bank.

This new neo-Keynesian or post-monetarist approach to demand management has been the proximate cause of the remarkable growth and stability enjoyed by the British economy since the mid-1990s, but the new methods could not have been attempted before several anterior conditions were satisfied.

On the one hand its the kind of theory you expect to read just before a great depression, but on the other it does describe the politics and economics of the past 25 years pretty well.

Posted by Orrin Judd at April 20, 2005 2:01 PM

I sat through a few economics classes in 1989-90 and well remember the proffs talking about targeting inflation as possibly a real improvement over targeting employment or the money supply.

I've always wondered how much of the economic benefit of this gets attributed to Clinton's presidency rather than Greenspan's competency.

Posted by: flanman at April 20, 2005 2:20 PM

ending the wasteful Cold War helped too.

Posted by: oj at April 20, 2005 2:24 PM

Either all that, or people have come to realize that politicians - like football quarterbacks - get way too much of the blame when the economy is poor. Or credit when it is good. Clinton created 20 millions jobs?

Posted by: Rick T. at April 20, 2005 2:33 PM

Actually, the Internet is the main cause of improved economic growth and stability. Macroeconomists are prone to give themselves too much credit. Greenspan was best at the beginning of his chairmanship, he's gotten worse every term. A simple rule to keep short-term rates one percent below long-term rates would be superior to Greenspan's management.

Posted by: pj at April 20, 2005 4:47 PM
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