Satyajit Das Presents a Global Economy Health Check
Mr. Global Economy gets a metaphorical physical and psychological examination. Here are the results.
The number of medical advisors involved and variety of drugs – stimulus, austerity, quantitative easing, leeches, cupping, witchcraft – is unhelpful. While doing nothing is politically and socially impossible, the treatments may be doing more harm than good. As French playwright Moliere noted, "More men die of their remedies than of their illnesses."
Interestingly, these same faith healers until recently oversaw Mr. Economy, prescribing regimes that caused the present financial and economic calamity. Perhaps like writer Samuel Beckett, they are keen to fail better next time.
There is no recognition of the limits to knowledge and policy tools. Economic relationships are poorly understood, complex, and unstable. Cause and effect is uncertain. Does money supply influence nominal income or does nominal income affect velocity and the demand for and thereby the supply of money? The ability of governments and central banks to influence economic activity is overstated. As economist Wynn Godley put it: "[G]overnments can no more control stocks of either bank money or cash than a gardener can control the direction of a hosepipe by grabbing at the water jet."
To paraphrase Voltaire's observation on doctors, Mr. Economy's faith healers prescribe medicines of which they know little, to cure diseases of which they know less, in economic and financial systems of which they know nothing.
Prognosis for Mr. Economy
Mr. Economy now has a serious chronic condition with limited prospects of a full cure. He might continue to live but in an impaired state with no or low growth for a prolonged period. The threat of a sudden life-threatening seizure cannot be discounted. Constant management will be needed.
Happily, Mr. Economy remains remarkably optimistic. Perhaps he recognizes the truth of Mark Twain's observation: "Don't part with your illusions. When they are gone, you may still exist, but you have ceased to live."
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