The 21st Century Case for a Managed Economy

Jacket text for The 21st Century Case for a Managed Economy

For decades, free-market economists have told a consistent story. Markets are rational, efficient, stable and fair, and even volatile financial markets should be left mostly to their own devices. Governments, meanwhile, should maintain basic institutions but should otherwise ‘stay out of the way’. This is supposedly the only route to prosperity and the only system that is consistent with human freedom. From the late 1970s, one government after another was influenced by this perspective and our era of free-wheeling capitalism was born.

The only problem is that there has never been much evidence that this kind of economy is best. There has been no boom in productivity, aside from that brought about by new technology based on the science of earlier decades and by the entry of China and India into the global economy. Instead, there has been a spiral of excess inequality and a series of financial crises that have posed an ever-greater threat to global prosperity.

The reason market fundamentalism fails is simple: it is built on economic theories that incorporate only one half of how the economy actually operates. These theories focus on a concept of long-run equilibrium that sees the economy as being continually drawn back to balance after any change from this position, in a form of what scientists would call ‘negative feedback’.

However, there is also ‘positive feedback’; a process whereby a given change amplifies itself until the system is driven far from equilibrium, and this phenomenon is equally visible in the economy. Positive feedback drives economic growth, speculative bubbles, inflation, recessions, deflation and self-perpetuating inequality. It is what gives us the secular trends and cyclical fluctuations we observe in the real economy. And it deserves to be a central part of our economic theory.

This book makes a first attempt at applying the concept of feedback to economic theory and economic policy. It finds that this perspective supports neither unrestricted free markets nor central economic planning. Instead, it supports the common-sense idea that a well-functioning economy requires a mixed economic system in which the role of the state is almost as great as that of the market.

In this mixed system, as well as providing basics of law and security, government must support the feedback loop driving economic growth by providing essential links in this chain. It must suppress the feedback driving economic instability by controlling the money supply, regulating finance and planning taxes and expenditure so as to anchor the economy. And it must suppress the feedback driving inequality through progressive taxation and provision of public services. These policies are all mutually reinforcing and the feedback perspective on the economy therefore represents a powerful argument for the package of views we know as social democracy.

Chapter headings for The 21st Century Case for a Managed Economy

Preface

1. Introduction: Lessons of the Great Recession
Building to a fall
Why didn't we see?
Time to think again
Equilibrium theory and its limitations
Introducing feedback
About this book

2. The Business Cycle
The credit-asset cycle
Cycles in prices, output and jobs
Speculative cycles in commodity prices
Explaining boom and bust

3. Depression and Hyperinflation
Falling off a cliff
When banks have no money
When money is worth nothing
Rolling recession

4. Counter-Cyclical Policy
Setting the rules
Control of the currency
The public purse
Saving the banks

5. The Limitations of Counter-Cyclical Policy
Enforcing the rules
Delayed effects
Liquidity traps
A policy philosophy
A stabilisation strategy

6. Counter-Cyclical Policy in a Globalised World
The agonies of the poor
Problems of rich and poor
Foreign exchange: help and hindrance
Watching the accounts

7. Policy Failures
Rolling out the red tape
Too much money
Exchange rate challenges
Reckless spending
Why conservatives are still wrong

8. Growth and Inequality as Feedback Processes
Explaining growth
Explaining inequality
The case for economic democracy

9. Feedback: A Complete Theory of Change?
Shared foundations
The inescapable logic of feedback
Trends and cycles: superimposition
Animal spirits
Different institutions: different outcomes

10. Old Thinking
Obsessed with rationality
Harder ideas of the free market
The voice of business
Political preconceptions
Honest mistakes

11. New Thinking
Borrowing from science
Getting the tools right
The behavioural approach

12. Conclusion: The Need for a Mixed Economy
An ethical foundation
Money: taking on a life of its own
Growth: is it good?
Stability: a prerequisite for well-being
Equality: benefiting rich and poor
The lessons of history

Appendix A: A Primer on Equilibrium Theory

Further Reading
References
Index

About Sean Harkin

Sean Harkin is a risk manager working in the City of London. He specialises in quantitative analysis of financial and economic data and has worked on structured finance, sovereign debt, bank capital and other areas. Sean was previously a research scientist working in the field of cell and molecular biology. He holds an MPhil from University College London and a BSc from the National University of Ireland.

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