Friday, May 23, 2008

Economics Issues which are no Longer Important

In a recent post, we looked at new developments in economics. These are some issues which used to be a matter of debate importance. But, have gradually faded from view.

Left vs Right

The twentieth century was characterised by a divisive ideological debate between Capitalism and Socialism. In Europe, versions of democratic Socialism was supported by many leading academics. The idea of public ownership vs Private ownership seemed a key issue in economics. The collapse of the Soviet bloc coincided with declining support for Socialist alternatives. This does not mean that people have embraced Capitalism. However, it is rare for people to argue for public ownership as the solution. The left have shifted their focus on reducing inequality through policies other than wholescale structural change in the economy. There has been a growing acceptance that free markets are the least bad solution. The debate comes on how to manage and regulate the free market rather than arguing for its complete replacement.
  • But, also there are others who argue Socialism and Capitalism are actually quite similar - they both aim to increase output and material living standards. However, others now argue that increasing output is not the goal of society. They argue the real debate is between Growth vs Environment
Monetarist vs Keynesian

When teaching economics to A Level students, we often provide a simple model suggesting there is a huge gulf between Monetarists and Keynesians. Good students will know that Monetarist think fiscal policy is useful. Inflation can be controlled by the money supply. Keynesians on the other hand believe government intervention can prevent economic downturns.

Empirical evidence has suggested a blurring of the distinction. Monetarist theory has proved very inexact. The relationship between the money supply and inflation is quite weak. The UK effectively abandoned Monetarism after a brief experiment in the 1980s. Keynesian theory on expansionary fiscal policy can sometimes work; data can be found to support both sides of the argument.

Credit Controls

Monetary policy used to involve complex credit controls and regulation of the banking system. For example minimum reserve ratios. You can still find these in old textbooks, but, it is many years since they have been used. Monetary policy tends to involve just changing base interest rates by an independent Central Bank.

No comments: