Have we finally learnt how to run economies?

Economic policy has been turned into a professional activity usually capable of solving problems
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The Independent Online

Do we need to worry about economic prospects any longer? Can't we just leave it to the specialists? In what are the best figures for 30 years or so, the International Monetary Fund (IMF) is forecasting 5 per cent growth for the world this year, slowing to 4.3 per cent next year. This good performance coincides with our own experience. The British economy has been growing non-stop for more than a decade. The pace has been modest but it cumulates. That is why unemployment has fallen so low that it has ceased to be a subject of debate.

Do we need to worry about economic prospects any longer? Can't we just leave it to the specialists? In what are the best figures for 30 years or so, the International Monetary Fund (IMF) is forecasting 5 per cent growth for the world this year, slowing to 4.3 per cent next year. This good performance coincides with our own experience. The British economy has been growing non-stop for more than a decade. The pace has been modest but it cumulates. That is why unemployment has fallen so low that it has ceased to be a subject of debate.

Of course, if you want to give yourself nightmares, there are plenty of reasons for doing so. What about house prices - are they not on the verge of collapse and wouldn't that be very damaging? Possibly, but house prices have been teetering on this brink for some time. And once the plunge in values begins, if it does, the Bank of England would cut interest rates.

Then one can look across the Atlantic and find really disturbing aspects of the American situation. The country is running a massive balance-of-payments deficit. And as we shall be reminded in the presidential debate later this week, the US government is having to borrow record amounts. True, but I have to struggle to remember when this was not the case (the budget deficits did disappear for a year or two under President Clinton). Yet somehow life has gone on and the US has had the best performing economy in the world for some time.

I accept that the stock market has not presented a uniformly pretty picture over these past few years. The collapse of the dot.com boom and the big drop in share prices from mid-2000 to 2002 was rightly classified as a major bear market. But while the performance of stock markets is anchored in the behaviour of economies, share prices often exaggerate trends; indeed that is their nature. The dot.com revolution, for instance, goes on every day to our great benefit even though the share prices of many of the pioneering firms collapsed to zero.

May I give what many will think is a surprising explanation for the relatively benign outlook for employment, prices and prosperity? We have learnt how to run economies. Economists have become good at their jobs. This wasn't the case when I first began writing about financial matters in the early Sixties. In those days we lurched from crisis to crisis, from boom to bust and back again, and Britain's problems always seemed worse than anybody else's. Economics dominated Mr Wilson's first government with devaluation of the pound in 1967 as its centre piece. Strikes, rising oil prices and plummeting output confronted Mr Heath between 1970 and 1974.

Well, once again we face rising oil prices, but see what the IMF said last week? The impact on global growth would be moderate, perhaps of the order of half a percentage point. As compared with the Seventies, "central banks had established far better anti-inflation creditability". In other words, the economists now know what to do.

Economics is a relatively young discipline. The first major textbook in this country was written by Alfred Marshal and published in 1890 - The Principles of Economics. Marshall was, as Keynes called him, the first great professional economist. But he was not able to persuade the University of Cambridge to establish economics as a separate degree course until 1903. For the next 50 years, progress was slow.

When I sat the A-level examination in economics in the mid-Fifties, I was among the first boys in the north of England to do so. Since then, however, the number of economists going into the Treasury, into the Bank of England and into the satellite think-tanks of these great institutions has expanded greatly.

Economists have spread into companies and into the City, where a highly paid elite is concentrated. At the same time they dominate a series of international institutions from the Organisation for Economic Co-operation and Development (OECD) to the World Bank, all created since 1945.

However, this might not have been enough to turn economic policy into a professional activity usually capable of finding solutions to problems, had it not been for a change for which the Chancellor of the Exchequer, Gordon Brown, deserves great credit. By giving the Bank of England independence, he took political interference out of the setting of interest rates, a move that has been followed around the world. It was a further professionalisation of economic policy.

Only one advanced economy has proved to be an enduring puzzle - Japan. Economists weren't able to prevent the country falling into a debilitating deflationary downturn in the mid-Nineties and they haven't really been able to see how to emerge from the quagmire - except that, more or less spontaneously, the Japanese economy has recently revived.

What I am arguing is that just as big advances in, say, public health have come about as medical knowledge and technique have cumulated, so in a similar way prosperous economic conditions have been established in the advanced economies. As with public health, however, the Third World has yet to benefit. But in both cases, what to do is known. In the West, it is being done and we can relax.

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