Thanks for posting - very interesting.
The biggest balls ups IMO were failings by the Bank of England and in particular, Andrew Bailey, who IMO is simply not up to the job.
First, the BoE failed to see the upcoming inflationary pressures and even after inflation was rising and way above the 2% target, they failed to raise rates enough or quickly enough. Then when the started to raise rates they kept on raising them and went to far. And have since failed to reduce them fast enough.
Inflation is caused either by excessive demand (rising faster than the ability to increase supply). Or alternatively, due to increased material and labour costs. i.e. in the former case, suppliers increase their prices because they can; whereas in the latter, they do so because they are forced to, or else they would sell at a loss. Unusually, this latter type of inflation was what we were witnessing in the latter stages, due to the massively increased energy costs, and wage increases that we're working their way through the system.
The BoE totally failed to understand this, and keeping interest rates high when we have supply side inflation, is entirely the wrong response. Dampening demand does nothing to help bring prices down when excess demand is not the cause of price rises. In fact it makes things worse, increasing costs even further and damaging sales.
Their actions prolonged the high inflation rates and severely damaged growth.
And incidentally the bond market crash was also down to the BoE failing to properly regulate the pensions industry, and in particular major issues with what are called LDIs - Liability-Driven Investment funds. All Truss did was precipate a problem that had been brewing for years.
Her only real failing - though it was a massive one - was failing to get the BoE on board, or to adequately explain to the City her plans to reassure them. So the BoE threw her under a bus and the City panicked.
Thanks for responding in such detail. I wish I could reciprocate but am unfortunately quite busy.
Inflation is an interesting one so your paragraph on that is intriguing.
The thing that fascinates me about economics is cause and effect (or causes and effects), and how the landscape changes according to how those are perceived.
Your point about the lack of regulation in the pensions industry also caught my attention.
That - to me - is the problem with neoliberalism. The lack of regulation you refer to has been felt before:
Start of 1990's - banking crises in Sweden, Finland and Norway
1994/95 - 'Tequila' crisis in Mexico
1997 - crises in 'miracle' economies in Thailand, Indonesia, Malaysia and South Korea
1998 - Russian crisis
1999 - Brazilian crisis
2002 - Argentina
2008 - We all know about that one
Virtually no country was in banking crisis between the end of the Second World War and the mid-1970's, when the financial sector was more regulated. Between the mid-1970's and the late 1980's, the proportion of countries who experienced a banking crisis rose to 5 to 10%, weighted by their share of world income. The proportion then shot up to around 20% in the mid-1990's. The ratio then briefly fell to zero for a few years in the mid-2000s, but went up again to 35% following the 2008 global financial crisis.
Got to get on, but my interest in all this arose from reading about Adam Smith, who was a fascinating character, along with that other Scottish Enlightenment figure David Hume, who I consider to be the greatest Western philosopher.
Have only read secondary sources on them both, but I suspect that - as a keen moralist - he would have been mortified by Friedman.
But as I mentioned earlier, my views have to be tentative because they are one-sided. I had to look at all this as part of teaching an A level course quite a few years ago (in Religious Studies (!) not Economics). Unfortunately, the syllabus changed in 2016 just as I was about to read
The Road to Serfdom and
Capitalism and Freedom.
It's a shame because my students were getting fantastic examination results because of the Business Ethics component. A whole A2 paper was devoted to it. After 2016, this element was completely dropped, replaced by a load of very boring Christian theology (am neither a Christian nor a believer in God, but that's another story).
I'll end this post with one obscure detail: the very title of Smith’s seminal work
The Wealth Of Nations, is taken from Isaiah 61, which is a prophecy about the ‘year of the Lord’s favour’, when Israel returns from exile.
It would therefore seem that Smith chose the title of his book very carefully. The implication is that his economic theory, if implemented, would create what the Biblical prophets promised.
The Wealth of Nations was published in 1776, a time when, in a more biblically literate culture, many of Smith’s readers would have picked up on that allusion to Isaiah.
More recently, Paul Oslington has revived the notion that Smith’s theory included the idea that although we act self-interestedly, divine providence acts a restraining force to maintain social harmony. In theology, divine providence refers to God's continued intervention in the world. A distinction is usually made between "general providence", which refers to God's continuous sustaining of existence and the natural order of the universe, and "special providence", which refers to God's extraordinary and specific intervention in the lives of people.
Although Oslington thinks that Smith’s overall theory of the market reflects the workings of general providence, whereby God operates behind the scenes to transform self-interested decisions into unintended benefits for all, he also argues that the one reference in
The Wealth of Nations to the famous 'invisible hand' is actually to do with special providence. The passage itself concerns a merchant who decides to invest in domestic industry instead of abroad, even though there were greater profits to be had that way. His decision to invest at home is guided by the invisible hand, though the merchant himself is unaware of this.
In conclusion then, Smith could be seen as arguing that an essentially capitalistic system of trading is both an expression and reflection of God’s hand at work in the world. God alternately ensures that social harmony and economic prosperity is achieved even though human beings act primarily out of sinful self-interest, and he also occasionally intervenes specifically to curb the excesses of merchants who are trying to individually maximise their own profits.
Wonder how many of Smith's neoliberal admirers know that?
But anyway, those last few paragraphs provide me with a pretext to post this link:
When I wrote that I was busy at the beginning of this reply, I meant that I need to nip out to buy the new album, which is released today.
