Monday, September 20, 2010

Governments taylor their economic policies to account for the economic illiteracy of their populations.

Britain’s finance minister, Alistair Darling, created £60bn out of thin air for the benefit of two banks, RBS and HBOS, when they were in trouble, but didn’t announce what he had done till about eighteen months later. Why? I think it was for much the same reason as Keynes backed a policy he knew quite well was second best.

Keynes said that in a recession governments should borrow and spend. Abba Lerner said governments should just print money and spend it. Keyes was well aware of the “print” option, but seems to have favoured the borrow option because it looked or sounded more respectable or sensible.

Keynes said of Lerner, “"Lerner's argument is impeccable but heaven help anyone who tries to put it across to the plain man at this stage of the evolution of our ideas.”

There is something unhealthy about governments pursuing policies they know to be flawed or second best, simply to take account of the economic illiteracy of the population or the “common man”.

To avoid the above problems in future, the ideal would be to make economics a compulsory school subject, with particular emphasis on when money printing is inflationary and when it is not. But not much chance of that, I suppose.

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