The ancient cycles of modern economies
The authors of Ancient Greece had a theory on the recurring cycles of political change. You could do worse than apply these lessons to our modern economic rotations.
According to the classical Greek authors, political change was subject to a recurrent cycle. We start with tyranny, which was overthrown by what was then called democracy. The notorious fecklessness of "the people” led the system to harden into an oligarchy, which mutated into tyranny again, leading to unacceptable burdens and thus a new democratic revolt; and so the whole cycle would begin again.
A comparable cycle, equally stylised, can be discerned in modern economic policy, whether at the level of an individual country or the community of industrial nations. We start with economic expansion, which rightly or wrongly is regarded as getting out of hand. Sometimes there is the threat of inflation, or alarm at budget deficits, or worry about the pace of credit expansion, and sometimes an exchange rate link looks wobbly. Often it is a combination of some or all of these.
The second stage is one of fiscal or financial austerity. This often disappoints, as the adverse effects on output and employment can come through well before the financial variables have stabilised. In the worst cases the slowdown in economic activity and employment may for a time cause budget deficits to widen. A call goes out from respectable sources, such as organised business, the official opposition and even the government’s political supporters, to "go for growth”. Heads of government then lean on their finance ministers to do just that: which in practice means attempts to stimulate demand without adding fiscal red ink. Examples are guaranteeing some investments or bank loans. But these may not do the trick in the absence of buoyant consumer demand. At first surreptitiously, and then more and more openly, the squeeze is eased, consumer demand stimulated and off we go on to the next boom.
In many countries and areas we are now at the stage of the "going for growth” clamour. This can be especially puzzling to ordinary folk in Threadneedle Street, as one set of left-of-centre critics are banging the drum for growth while another set, in the company of some religious leaders, moralists and philosophers, are denouncing the obsession with ever-expanding material prosperity in countries that are already rich, and want to call a halt. An important sideshow is the attack on central banks’ low interest rate policies for depriving pensioners and other past savers of the fruits of their thrift.
The debate could do with a little clarification. The economist and journalist Peter Jay once made a distinction between "Growth 1" and "Growth 2".
Growth 1 means reducing the gap between actual and normal rates of employment and capacity utilisation: for instance between the present UK unemployment rate of 8.1 per cent and a sustainable rate, estimated at 5.4 per cent by the Office for Budget Responsibility. Advocates of Growth 1 are basically arguing for a demand stimulus. The question is what kind this should be and whether it conflicts with the government’s original deficit reduction strategy. The answer is: "Yes, but so what?” Although the latest fall in inflation may be partly a blip it provides a handy pretext for more monetary or fiscal stimulus.
Growth 2 is a more long-term concept. Once the economy is as near to full employment as is feasible, how important is it for output to be on a rising trend? What matters, even to a growth addict, is output per head. An increase in gross domestic product that merely reflects population growth is hardly a sensible policy objective. The worst argument for a liberal immigration policy is that it will increase a country’s total GDP. Beyond that, opinions divide. Increasing GDP per head is desperately important for the half of the world’s population still near the poverty line. For the rest of us it is surely sensible to factor in leisure, for instance by estimating GDP per hour, which is too rarely done in the headline statistics.
The cultural critics have a point in saying that current institutions and attitudes prioritise take-home pay over leisure and encourage forms of growth that pollute the environment. Think of all the burial fields for used cars. The growth advocate can legitimately retort that growth need not take a material form. Suppose that you play the flute and I write poetry. If both the flute-playing and the poetry improve, that is growth. How do we know that it has improved? Because others will hand over more material goods (in the form of cash) for the privilege of hearing and listening to us.
This is as far as one can sensibly take the argument. We are all entitled to our opinions on how well or badly citizens spend their income and leisure – although in my view that is better done through imaginative literature than by lecturing people. Meanwhile, let governmental authorities concentrate on securing conditions for as near as practicable full employment without inflation and removing distortions at the micro level. Then let the growth rate emerge as a byproduct of the activities of individual citizens, who do not need to be hectored with quotations on the good life from Aristotle or anyone else.
Copyright The Financial Times Limited 2012.