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Keynesians, Neo-liberals and the Government’s economic recovery train wreck

By Tom Papworth
December 2nd, 2009 at 12:12 pm | Comments Off on Keynesians, Neo-liberals and the Government’s economic recovery train wreck | Posted in Economics

The government’s economic recovery policy consisted of two tracks: “fiscal stimulus” and “quantitative easing.” The former was discredited decades ago, but now the latter, too, appears to be failing, despite it being the tool-of-choice of the neo-liberal consensus that dominated macro-economics since the 1980s.

My latest article at the IEA blog spells out why.

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Comment is Linked: Tom Papworth on Quantitative Easing at the IEA blog

By Tom Papworth
August 7th, 2009 at 12:35 pm | 1 Comment | Posted in Economics

gordodarlingThe following article was published on the Institute of Economic Affairs blog yesterday, and is reproduced here with their permission.

The Bank of England’s decision to pump an additional £50 billion into the economy, over and above the £125 billion earlier this year, has been accompanied by the sound of Keynesians cheering that quantitative easing (QE) has worked.

Robert Peston argues that QE should lead to “lending increases, spending increases, price rises and investors’ appetite for risk returning”. And the BBC duly notes that “there are very tentative signs of a recovery. House prices are increasing… factories are producing more, retail sales have risen slightly and lending is on the increase…”

The problem with this is that it is based on correlation. There is no proven link between the Bank’s policies and the apparent upturn in the economy. Nor should there be. BoE Deputy Governor Charlie Bean has noted that – like interest rates – it takes time for QE to have a discernable effect.

But even if this were not so there is no way to tell whether QE is causing the upturn, is merely happening alongside the upturn, or whether it is in fact laying the ground for the next recession (as classical economics would suggest).

Rather, Quantitative Easing is benefiting from the inherent advantage enjoyed by all interventionists: as any crisis is followed by a reversion to trend (“business as usual”), so any recovery can be attributed to actions taken in response to the crisis, whether they had an effect or not.

Ludwig von Mises argued that economics could not be empirical: one could not treat it as an experimental and evidence-based science (like physics) but should instead consider it a logical science (like mathematics). In something as complicated as an economy, where tens of millions of actors are making countless decisions every day, one cannot have all the knowledge required to draw causal links, nor can one conduct experiments.

Yet the enthusiasm with which Quantitative Easing is being cheered is based entirely upon the fact that recovery has followed easing. Recovery may just as well have followed no easing. Recovery may have been quicker, or at least more sustainable, without it. We cannot know. What we do know is that reckless expansion of the money supply causes inflation and structural imbalances in the economy and so lays the seeds of the next recession.

The Bank of England, and the rest of us, should take note.

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