New Directions In Economic Policy

Technicalities aside, the failure of economics as a science which enables policymakers make the right calls has come down to a central inability to cope with the creation of debt at an unsustainable rate and the corresponding bubbles that are generated as a result. Indeed, this inability to recognise debt as a central driver of financial crisis seems somewhat pervasive. Whilst acknowledgement of this problem is necessary as a means of closing in on a solution, it remains insufficient in helping us address the underlying causes. The terms greed and avarice are invoked in the context quite readily yet such observations do seem somewhat at odds with the notion of an entrepreneurial market economy requiring the existence of self-interest and risk-taking in order to generate value. We must ask ourselves what sorts of risk-taking are compatible with the aim of achieving sustainable growth? The pitfall that economies, in particular the UK, have become victims of is that returns made on financial investment are considered equivalent in economic worth to returns made on goods and services. That is to say, at a societal level, nobody minds whether a 5% return is made on selling consumer goods and services compared with making a 5% return as a result of investment in a financial asset. To be sure, a certain amount of the return on a financial asset may well be derived from real profits associated with the underlying/associated company or firm. However, it is quite possible that short term gains made by firms in the City derives from speculation that has been realised. In short, much of the ‘value’ that is generated by banks and fund managers that goes above and beyond the underlying trend rate of growth occurs as a result of collective speculation that has paid off for the time being.

Policy design cannot necessarily easily help with distinguishing and discerning between ‘good’ or sustainable economic activity and wealth creation, and poor quality activity. Indeed any attempt, no matter how well considered, may very well suffer from government failure as people find ways of circumventing any difference in treatment by the tax system or regulation. Guidance from the top, then, must consist of a different, more subtle kind - one based on the vocalising of certain values consistent with high quality wealth creation perhaps. Guidance on how people ought to distribute their savings - going above and beyond ISA’s - ought to be an option for governments. Allocation of savings needs to be something that firms and people are able to take a longer-term view of, not just that which yields the highest short-term returns. If people were educated better about how to manage their money then that may help with bringing about a culture of saving that is more compatible with growth. Currently savings are not allocated as efficiently as they could be in a dynamic sense. The system of values that may evolve out of this approach could be used as a way of creating a ‘sustainable investor accreditation’ to be awarded to fund managers that invest responsibly. Responsible investment could loosely be defined as having a portfolio balanced well along short and long time horizons and distributed horizontally across sectors with a greater bias towards the productive economy and less so on assets that are susceptible to bubbles. In this manner, a new set of light-regulatory tools may develop which would help governments to fine-tune private-sector investment.