THE ECONOMY
Monetarism is dead, long live monetarism
JAMES BARTHOLOMEW
here is a strange quiet among our previously contentious economic theorists. Where once the disputes between Keyne- sians, monetarists and supply-siders roared, now their controversies are mur- mured and their arguments whispered. Where once Milton Friedman appeared on television lecturing us on our mistakes and economists in their three hundreds signed doom-laden letters to the Times, now there is . . . technical discussion.
There is a fallacious theory to explain this recession in economic debate. The theory, rarely openly expressed but some- times hinted at, goes something like this. Monetarism, the great hope of the infla- tionary 1970s, has been discredited. Being almost synonymous with the policy of the Conservative Government since 1979, monetarism has to bear responsibility for the astringent recession of 1980-81 and the roll-call of three million unemployed who lost their jobs in the process of proving monetarism wrong. Since then, monetar- ism has further blotted its textbook, so this theory goes, because we are now suffering inflation at around eight per cent and a current account deficit of about i18 billion. Inflation was surely the one thing which the monetarists were meant to be good at demolishing. If they can't even manage that, why bother with them?
This theory is rarely expressed because it unfortunately comes up against the brutal fact that tough monetary control from 1979 to 1985 brought down inflation from over 15 per cent to 5 per cent. That achievement is hard to dispute. The argument that is truly left is whether it could have been done more gradually and less painfully.
The current inflation, meanwhile, has not discredited monetarism at all but, on the contrary, has confirmed its importance. The inflationary super-blip has arisen pre- cisely because the Conservative Govern- ment, carried away with its own success, thought it could do without monetarism. It arrogantly set aside the theory which had once been at the centre of its policies. A few economists noticed and issued warn- ings of inflation to come. Those few economists who warned of the current inflation were those most closely wedded to monetary theory. The Bank of England scoffed, the Treasury found 'exceptional circumstances', Lawson decided to track the dentschmark. But Tim Congdon, a thorough-going monetarist, consistently warned in his research for a stockbroking firm that the fast growth in the amount of money in 1986 and 1987 meant that infla- tion would rise in 1988 and 1989. This is exactly what happened. Certainly the Con- servative Government got it wrong. But monetarism was vindicated.
So why is the debate about monetarism now so muffled? Because monetarist theory is now absorbed into mainstream economics. Instead of being a raucous, angry young man, monetarism is now in the boardroom sharing cigars with the chairman.
At a recent seminar to launch a pam- phlet by Tim Congdon, a number of Britain's most prominent economists were on the panel or in the audience. Tim Congdon was disappointed that he had not convinced them all with his analysis of the last ten years. But in fact the remarkable thing about the seminar was not the disagreement, which was largely technical, but the consensus. No one stood up, declared himself or herself a Keynesian and lambasted monetarist analysis as dangerous and wrong. True, the junior minister from the Treasury found excuses for what had gone wrong. But even some of his excuses clearly reflected a monetarist approach.
There are some corners of resistance still. Those who have made their careers as Keynesians are not inclined to learn new tricks. The Labour Party, attracted by the 'monetarism disgraced' fallacy, still bravely resists the idea that the amount of money in the system affects its value. Britain, unlike most countries in the world, remains quite rich in unreconstructed Keynesians. But many other former British Keynesians have disappeared altogether or built on monetarist rear additions to their basically Keynesian buildings. Meanwhile some of the monetarists, too, have come off the most excessively rigid parts of their own constructions. They have learned, at the least, that standing only on one measure of money can be perilous.
In America, the Federal Reserve Board is headed by a man who has invented an indicator which includes both Keynesian and monetarist concepts. This is the way economic theory is going. Monetarism is being integrated into the mainstream. We have entered the age of pragmatic mone- tarism or post-monetarism.
If we have absorbed the lessons of
monetarism, why do we still have inflation in the world and why is it particularly bad in Britain? The answer is very simple. It is that monetary policy is still, to varying degrees, in the hands of politicians. Of course the politicians know how to keep inflation down almost as well as econom- ists. But for them, winning elections has a higher priority. If possible, they like to let money grow in the year or two before .an election with the idea that the resulting boom will encourage the electorate to vote for them. Inflation, which lags behind growth, conveniently arrives when the election is over.
That inflation is caused by political control is demonstrated by international comparison. Inflation in different countnes varies according to the independence of the central bank. In Germany, where inflation is minimal, the independence of the Bundesbank is enshrined in the con- stitution. In America, there is a moderate amount of state intervention and a moder- ate amount of inflation. Britain has the worst inflation record of the three and its central bank has the least independence. Surely it is time we woke up to this and made our central bank independent? The Bank of England should be made constitu- tionally separate from the government of the day. Then inflation could be polished off forever. The idea could be a vote winner for an opposition party, especially one like Labour with a bad record on inflation. Labour does not take this oppor- tunity because it still wrongly thinks mone- tarism is a right-wing policy. And yet even Labour has adopted a policy which is a proxy for monetarism. Labour wants to join the European Monetary System. That would give some control of our money growth to the post-monetarist Bundes- bank. You can't keep a good theory down
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