Friday, April 3, 2009

Risks in political economy

There are many things to be said about the present financial crisis; much has been altered in our knowledge of political economy since the writings of Mr Adam Smith.

I note that Mr John Maynard Keynes was a great liberal and that his analysis of a great financial collapse some 80 years ago influenced much of the last century. Indeed I hear he continues to influence the present British Prime Minister and the new, young president of the United States.

It is felt I might be inimical to Mr Keynes' ideas in that they envisage the government spending large sums in an attempt to redress financial collapse. I have spent a little time studying his writings and I do not reject them; I do urge they be approached with caution.

For it is apparent that Mr Keynes wrote eloquently about the cause of the great problems of his era; and indeed some that bedevilled my own age. When the world sailed into further storms some 30 years ago and millions more were thrown on the mercy of the State, his solutions proved inadequate and were replaced by those who claimed to be heirs of Mr Smith, notably Mr Milton Friedman.

I would therefore proffer some cautious thoughts on the present crisis: it may be unlike the crisis of 80 years ago and also that of three decades ago; it may have points in common with both and points of difference with both.

Mr Gordon Brown places his faith in "fiscal stimulus" but also in the expansion of the money supply. The latter is a ploy I used myself on occasion to good effect. The expectation is that demand will bring forth supply; for Mr Keynes' insight was to recognise that when industries lie idle it may be because the flow of money has ceased.

It is assumed that because the banks have ceased lending, because businesses cannot draw on their credit, this is the problem; yet it is also the case that reductions in the rate of interest, small reductions in tax and substantial reductions in the price of fuel have placed money in the pockets of many. It is said money is not flowing from these newly enriched people because they have debts to eliminate and remain uncertain about the future.

Yet it is not apparent that the flow of money into the pockets of individuals has enabled them to purchase more. For I hear that the rate of increase in prices, certainly in Great Britain, has not necessarily slowed to zero.

This was the discovery made in the latter half of the last century; that even by increasing the flow of money you may not bring forth supply. You may bring forth increases in prices. It is therefore alarming if the increase of prices in the shops has not ceased but continues to proceed at a steady rate.

It was always my habit to continue to pay heed to the great merchants of Liverpool; it is by talking to business people in amiable settings that one understands the state of the political economy. And I hear that in business at present merchants and manufacturers are not necessarily able to take advantage of cheap prices; and that this may be a problem that is peculiar to this century.

For if a supplier offers a low price, the purchaser faces particular risks, especially if the product embodies a high level of intellectual knowledge. It is possible in conventional circumstances to protect one's contracts; one does not pay for widgets until they are delivered; if they are not delivered one merely approaches another company to provide substitutes. But the more complex the item, the more expert the supplier, the more time and expense is consumed in establishing a contract.

It is therefore necessary for purchasers to be cautious about suppliers and not to commit themselves to contracts that may not be delivered. The result is to increase the price of contracts and to, as an unfortunate consequence, reduce the number of suppliers.

There are therefore new risks entrenched in the political economy of the 21st century that may be preventing the free flow of money and the necessary fall in prices. It is said that the banks can alleviate this by lending more freely to businesses. This is a possibility; for it is difficult to think of other solutions that might not simply lead to general increases in prices rather than in productive activity.


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