Irrational Expectations

Barry Supple

  • The 1982 Budget edited by John Kay
    Blackwell, 147 pp, £10.00, July 1982, ISBN 0 631 13153 1
  • Money and Inflation by Frank Hahn
    Blackwell, 116 pp, £7.95, June 1982, ISBN 0 631 12917 0
  • Public Enterprise in Crisis: The Future of the Nationalised Industries by John Redwood
    Blackwell, 211 pp, £5.25, May 1982, ISBN 0 631 13053 5
  • Controlling Public Industries by John Redwood and John Hatch
    Blackwell, 169 pp, £12.00, July 1982, ISBN 0 631 13078 0

It is a nice question whether Britain’s economic institutions or the attempts of economists to explain why they do not tick are in a greater mess. Every now and then, albeit with decreasing regularity, a government minister will tell us, as the Chief Secretary of the Treasury does in the collection of essays on The 1982 Budget, that there is a new dawn over the hill, that, before our very eyes, ‘things are improving’ – only to be contradicted by some even more authoritative voice, although it hardly needs the CBI to remind us of the frailty of political positive thinking. Yet the present administration has at least made Britain’s economic sickness superficially more accessible to reason by specifying both the disease and its putative cure in radically simple terms.

For three years now we have been living with a political economy which acknowledges only one basic problem (rising prices) and only one possible solution (monetary restraint). When the Labour Government of 1974-79 abandoned Keynesian demand management as the centrepiece of its policy, it was sufficiently conservative not to allow a new preoccupation with money and credit to obliterate a vestigial concern with such traditional economic problems as the level of unemployment or the balance of trade. It remained for Mrs Thatcher to stake her all on a single objective and a single instrument – even though the principal focus of the latter seems to have shifted from the control of the money supply to the reduction of the public sector borrowing requirement (PSBR). If these magnitudes can be brought to heel, we are cajoled, then all else will follow.

How far this laser-like vision of reality comprehends a coherent body of economic theory is not immediately obvious. Certainly, it is replete with incantations which suggest an unusual correspondence between political policies and economic models. And the constituent elements of at least some versions of recently fashionable monetarist theory can be discerned: the presumed difficulty – even impossibility – of a government acting successfully as well as directly to determine the performance of the ‘real’ economy; the monetary essence of inflation; the importance of ‘rational expectations’ on the part of economic agents, and the consequent need to ensure absolute consistency and predictability in government financial and monetary policy; the intangible, conceivably empty, conceptual meaning of ‘involuntary’ unemployment. And for their part, many academic monetarists find much to applaud in the Government’s economic posture. Clearly, a symbiotic thread runs between the new economics and the new Conservatism.

It would be good to be able to report that The 1982 Budget offers a useful introduction to the current debate about economic policies. Intended as a survey, from various theoretical perspectives, of our annual ritualistic grope with economic reality, it certainly should fill that role. In fact, however, it is an unsatisfactory guide: partly because its authors are talking, if not to the converted, then at least to the initiated, but principally because what they actually offer is a rather loose collection of attenuated, episodic comments, many written in a staccato and allusive style. Moreover, the book lacks what would, to the innocent, appear to be indispensable: a systematic description of what the Budget was actually about in the context in which it was formulated.

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