Public ideas
One damn theory after another
A historical account of macroeconomics, focussed on policymakers’ attachments to dysfunctional ideas.
“No one understands how the economy works and no one can understand. The problems tend to arise when economists claim they do know, and governments believe them”.
That’s the opening paragraph of Martyn Goddard’s three-part essay “One damn theory after another”.
The first part of his essay takes us from the 1930s depression up to the oil shocks of the 1970s. He suggests that the most consequential idea leading to the misery of the 1930s was the gold standard, to which countries held on for far too long. He moves on to the New Deal, influenced by Keynes’ ideas, and the ideas that drove the postwar successes of Japan and Germany. The underlying theme of this part of his story is the effect of economic shocks which require policy makers to act quickly.
The second part is largely about the neoliberal era, beginning with the ideas, borrowed from Austrian economists, that provided cover for Thatcher and Reagan’s “small government” policies. These resulted in widening inequality and increasing government debt, but that didn’t discourage neoliberals. Monetary policy came to the rescue, precipitating a severe recession in the early 1980s.
Part 3 is about when banks took over the world. It’s about the era we’re now living through, as the finance sector, once meant to serve the real economy, becomes dominant, sucking resources out of the real economy. Unsurprisingly it starts with the first manifestation of that development, the financial crisis of 1977 and 1978. His account finishes with the ideas of a New Zealand economist that have driven central banks into a zealous struggle to chase after an abstract number.