Wednesday, 22 January 2014

Learning from past masters

If François Hollande was trying to learn from history he got it badly wrong. Many people have already commented on the fact that he had a mistress thinks that 'supply creates its own demand'. As Dean Baker pointed out, this assertion 'startled many of his supporters ... along with fans of evidence-based economics everywhere'. Say's law was a central tenet of classical economics in the 19th century. But it turned out that it was wrong nearly a century ago: the experience of the Great Depression and the Keynesian revolution in economic analysis convinced most economists that demand could remain weak over prolonged periods and lead economies to work below full capacity.

However, the main problem is that Hollande is not alone with the view that the key to solving the economic crisis lies on the demand side. His misfortune was to exaggerate this claim. But most economic policy in Europe is driven if not by Say's law, then by some version of economics that puts supply first. See my last post on Renzi's Italian jobs act. This is despite the fact that the evidence strongly suggests that programs to stimulate demand effectively boost growth and employment. (See Baker's article and the links in there.)

But what works economically seems to have become completely irrelevant. Supporters of austerity in politics, among economists and in the public at large seem to be driven by a completely different set of motives. I will come back to this issue on this blog but it's also what I write about in 'Austerity: the great failure'. Now forthcoming very very soon.

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