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No single approach will fit all conditions; the maths is crucial
November 9, 2009
By Ethel Hazelhurst
A semantic oddity is that describing a philosophy as new gives it credibility; but attaching the adjective "neo" is pejorative. Opponents of global capitalism talk contemptuously about "neoliberalism" and put forward a grand vision of a "new" economic approach.
While the threatened collapse of financial markets, between August 2007 and the end of last year, dramatically demonstrated the dangers of unfettered market behaviour and prompted considerable soul searching among those who believed markets work efficiently, the remedies proposed are often ridiculous.
One thing is certain: there's nothing new about the "new economics". It is recycled Keynesianism, which worked in the 1930s but proved ineffective in the stagflationary (low-growth high-inflation) 1970s, just as the drive to deregulation by the former UK prime minister Margaret Thatcher and former US president Ronald Reagan were Adam Smith's invisible hand in a modern guise.
Though deregulation was very effective in promoting growth in the US in the 1980s and 1990s, the financial crash showed the hazards of poor regulation, which is not identical to little regulation.
Moreover monetarism, a corollary of small government in the Reagan-Thatcher framework, could have stood us in good stead recently. Nedbank group chief economist Dennis Dykes points out that if money supply had been targeted as monetarists prescribe, the credit bubble in the US would not have reached disastrous proportions.
Both interventionist and non-interventionist approaches have worked in certain circumstances and have failed to work in others. But proponents of both views often refuse to recognise their limitations.
Meanwhile some of the policy proposals in South Africa border on idiocy. Given the disasters unfolding at Eskom and the SABC, it's clear that nationalising an industry in the current environment would turn functioning firms in the private sector into public sector basket cases.
The "third way" is another concept that is not always useful. Sweden is often given as an example: a market economy that extends a broad social security net to its population.
But Sweden has a substantial tax base which makes it a poor model for South Africa, where a little over 5 million individual taxpayers support 45 million people.
It's important when making policy proposals to understand the maths.
Another controversial issue that generates irrational debate is the widening wealth gap. But what is more important: that the poor get less poor or that the gap should be narrowed?
In good economic times everyone benefits - but when the growth is boosted by technological advances, those with greater access to education and technology benefit most. That's the reality. And if we turn our back on technological advances the poor will get poorer, not richer.
There is also irrationality in the debate about bonuses - including rage because a banker gets paid more in bonuses than in annual salary. What matters is how the bonus is structured; what is being rewarded - short-term gains or sustainable growth?
It's important that the fundamental issues should not be buried under mounds of muddled thought. And it's very dangerous to ignore the maths.
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