In America, and in the UK, the 1980’s heralded an era that produced two gods and a goddess of monetarism. Right-wing Republicans and Tories have worshiped them ever since. The political leaderships of Ronald Reagan and Margaret Thatcher spanned the decade, just at the time Milton Friedman was espousing his theories of monetarism. Indeed, he served on Reagan’s Economic Policy Advisory Board throughout that president’s time in office.
Both Reagan and Thatcher were bewitched by Friedman. The idea of allowing markets to control themselves with little or no interference from government seemed almost frighteningly practical and modern, after years of Keynesian economics dating back to the 1930’s.
John Maynard Keynes was a British economist of whom Bertrand Russell once wrote:
“Keynes’s intellect was the sharpest and clearest that I have ever known. When I argued with him, I felt that I took my life in my hands, and I seldom emerged without feeling something of a fool. I was sometimes inclined to feel that so much cleverness must be incompatible with depth, but I do not think this feeling was justified.”
“One morning I met him hurrying across the Great Court of Trinity. I asked him what the hurry was and he said he wanted to borrow his brother-in-law’s motorcycle to go to London. ‘Why don’t you go by train’, I said. ‘Because there isn’t time’, he replied. I did not know what his business might be, but within a few days the bank rate, which panic mongers had put up to ten per cent, was reduced to five per cent. This was his doing.””
Russell declared him the “most intelligent man” he had ever known.
Friedman persuaded Reagan and Thatcher that Keynes’s ideas were outmoded. Both leaders fell under his spell, rapidly concluding that every problem could be solved by the markets, through economic innovation, provided they were left to their own devices, with no interference from government.
It was this ideal that caused George W Bush to falter so famously over admitting the existence of global warming. If he’d accepted the evidence, he’d have been forced to act. Bush expected the markets to swing into action and create their own emission caps based on fresh, profitable technologies designed to save the earth.
It never happened. Short term market greed trumped any idea of private investment in planet-saving enterprises, for close to a decade.
Ordinary folks may be surprised of late, when listening to economic discourse, to realize just how many booms and recessions the western world has suffered over the last twenty-five years. While western economies cannot be considered stable prior to Reagan, (his predecessor, Carter, had presided over a period of stagflation) it’s obvious with hindsight that Freidman’s policies utterly failed to provide a stable economy advantageous to any but the very wealthy.
Keynes advocated heavy investment by government during periods of recession. Friedman believed government should keep its fingers out the markets and allow them to stabilize themselves. The financial crisis presently threatening the economic world has sent governments scurrying back to Keynesian policies, with huge injections of cash into the system, in a desperate attempt to stabilize the markets and avoid the threat of a recession looming across the globe.
If any lessons are to learned from this latest, and possibly greatest, financial catastrophe, it is that Thatcher, Reagan, and Friedman were absolutely wrong. Markets require regulation; it has to come from government. Politicians, and their advisors, must be prepared to assume responsibility for the fiscal system and control it, rather than use it to simply line their own pockets.
This, in turn, means it is the duty of the people to ensure those they elect are capable of shouldering that responsibility without recourse to corrupt practices. The demand for more transparent government must be strong. Without pressure from the people, government will never change.
John Maynard Keynes died in 1946. If he’s out there somewhere, watching the events of 2008 unfold, he will undoubtedly be smiling to himself.
 “The Grantchester Group”, The Orchard Tea Garden
Filed under: Economic errors