Wednesday, February 11, 2009

Economics and Politics

Readers Question: Which political party do you support?

I don't support any political party. In the past I have voted for a couple of different parties. I have also failed to make it to the ballot box. Where possible I try to ignore political ideology. A good economist would try to weigh evidence and draw conclusions even if they went against his political preferences. Sometimes we try to find the economics to support our political point of view. But, in my opinion, this is the wrong approach.

So in theory, I try to be independent of politics. However, in practise, we all have our preferences, ideologies and prejudices. Readers will probably have picked up I have certain preferences.
  • Supporting Keynesian fiscal policy under certain circumstances.
  • A preference for Pigovian taxes (taxes to make people pay for externalities) e.g. Road congestion charge, tax on fatty foods.
  • Greater income redistribution.
  • A qualified support for free trade. Generally I support free trade, though there are certain cases where developing countries would be justified to have tariffs.
  • A scepticism on the desirability of the Euro for the UK, Ireland, Spain and Greece. (yet, for countries at the heart of the Eurozone it has probably been beneficial.)
  • A somewhat reluctant acceptance that free markets are most efficient for distributing resources. Though there are many markets and occasions where we shouldn't leave things to the free market.
However, I hope that if compelling evidence suggests these opinions were no longer valid, I would change my mind. A stubborn reluctance to change your mind in the face of contrary evidence does not make you a good economist.

Also, politics tends to encourage us to see things in black and white.
  • Everything the government does is bad.
  • Everything the opposition proposes is rubbish.
The problem with economics is that it is a difficult subject. Often issues are not black and white but depend on various factors.

For example, I would give the government about 30% of the blame for the current recession. I would give them about 6/10 for their response to the crisis. They have made some mistakes, but, if I had been chancellor of the exchequer I would have probably made similar ones.
For the last recession in 1991, I would have given the government 85% of the blame.
But, this doesn't mean I support Labour over the Conservative party.

When reading the blogosphere, you often come across economic evangelists, who have an ideological certainty that what they propose has to come true. I am always sceptical of such certainty. The more I study economics the more complicated I realise it is and how difficult it is to predict what will happen.

A good example, is whether increasing money supply increases inflation. Many what a simplistic answer - print money and you will inevitably get hyperinflation like in Germany in 1923. However, it is more complicated than that. It depends on velocity of circulation, it depends on institutional factors that determine use of cash, it depends on inflationary / deflationary expectations e.t.c,

1 comment:

Robert Searle said...

What is needed is a NEW PARADIGM.I would suggest my work in progress project of Transfinancial Economics.

An authorative account can be found at the p2pfoundation.

Robert Searle