View from City Road: Closed models and closed minds on jobless

Thank heavens the Treasury was never put in charge of producing an economics textbook. It would not have got beyond the chapter on macro-economics in a closed economy. In the real world of open economies that trade with each other, there must surely be other considerations in the question of unemployment apart from labour market flexibility, deregulation, privatisation and training, important though all those items undoubtedly are.

The central problem with the Treasury's paper on 'Competitiveness and employment: policy for the industrial countries' is that it only looks at one blade of the economic scissors: the supply side. What about demand? Do we really suppose that Jean-Baptiste Say was correct to argue that supply creates its own demand? While inter- planetary trade remains in its infancy, can all countries pursue competitiveness and export-led growth? Is it inconceivable that international monetary or other arrangements could help to sustain unemployment above the level determined by more long-run causes such as labour market inflexibility?

Memories are clearly short, for Britain's own experience of leaving the exchange rate mechanism, cutting interest rates, and recovering rather more smartly than most people had previously predicted surely belies the Treasury's present emphasis. Europe's high unemployment is not just due to labour market rigidities. It is also due to policy rigidities, many of them in the Paris Tresor and the Bundesbank. Sadly, Britain will not be making that point at the Detroit jobs summit next week. It will be left to the American administration.