Philip Stephens:
When I first started writing about the subject for the FT during the early 1980s, Margaret Thatcher worshipped at the altar of something called “monetary base”. The government, this creed promised, had only to regulate the quantity of notes and coins circulating in the economy and just about everything else would fall into perfect place.
Soon enough, monetarist fundamentalism proved a false prophet. The experience led to the annunciation of the heretical Goodhart’s Law. Bearing the name of one of the trade’s distinguished free thinkers, this says that as soon as a government seizes this or that indicator as an infallible lodestar it becomes a wholly unreliable guide to economic performance.
The Treasury was not discouraged. Targets for narrow money were followed by efforts to regulate broader measures of credit. When that failed, economists seized on the exchange rate. The markets blew up the policy on Black Wednesday. The catechism was rewritten once again to replace fixing the value of the pound with a cap on inflation. Then came independence for the Bank of England. More recently, the inflation target has been all but jettisoned in favour of fiscal flagellation.
There have been lesser deities along the way. Gordon Brown genuflected before something called the Golden Rule. Markets were sanctified as all-knowing and all-powerful. The Washington consensus paid tribute to a divine capacity to sustain permanent equilibrium. This convenient credo was called the new financial capitalism.
Each of the gods has been worshipped with the fanatical fervour of the convert. What is curious for those sitting outside the sacred circles is that the apostles show not the slightest hint of self-doubt. The Treasury has become to economics what cults such as Opus Dei are to Catholicism.
The Treasury’s present leadership used to proselytise for Mr Brown’s borrow-till-you-are-broke approach to managing the economy. Now, the same mandarins threaten George Osborne, the current chancellor with the eternal fires of hell should he deviate from their new devotion to fiscal austerity.
The Bank of England failed just as spectacularly to safeguard financial stability and ensure low inflation. In the years before the crash it busied itself in sacking financial regulators. Yet when Mervyn King appears before the assembled City at the Mansion House, he does so as the prophet who will lead his people from the desert.
The British are not alone in such frailties. A couple of years ago, economists in (nearly) every corner of the world issued dire warnings about the threat from something called global imbalances. We were all doomed unless policy makers acted to rebalance trade between the US and China. And now? As the FT reported earlier this week, celestial intervention seems to have sorted the problem out.
I exaggerate. But only a bit. Of course, we need economics. Keynes was a smart chap. So in his way was Hayek. Look hard enough and the trade offers some useful signposts as to how to steer the economy. As a Catholic, I also have to admit that faith is not all bad.
There are lessons, however, for politicians. The first is that the fervour with which economists propagate this or that theory is usually in inverse proportion to the evidence. Fanaticism is thrown as a cloak over the absence of empiricism. The present devotion in Europe to slash-and-burn fiscal policies is a case in point. Didn’t Keynes say something useful about the paradox of thrift?
The second lesson is that policy makers should always treat advice with a large dose of, dare one say it, sceptical secularism. When the economists are wrong they simply move on to the next deity. It is rather harder for prime ministers and chancellors to rush into the arms of apostasy.
As for economists, they could help themselves by shedding a few of the certitudes. To borrow from John Kenneth Galbraith, there are those who don’t know, and those who don’t know they don’t know.
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