‘The World is a very complex system. It is easy to have too simple a view of it, and it is easy to do harm and to make things worse under the impulse to do good and make things better.’
At the turn of the twentieth century the principles of a free society were under threat. Karl Marx presented two main critiques of capitalism. The first was that it creates increasing concentrations of capital (i.e. monopolies) and the second was that it generates systematic contractions (i.e. business cycles). Chapter 5 intended to challenge the first claim, and this chapter is focused on the second. We have already seen how central banks can generate booms and busts. We will now look at how decisions about taxing and spending can make things better, or possibly make them worse. Far from being inherent properties of capitalism, business cycles and economic crises are more often down to government policies that misunderstand how markets are supposed to work. Attempts to ‘calm markets’ and ‘restore confidence’ have the potential to backfire if people become uncertain about what actions government will take, and divert resources to trying to anticipate and protect themselves from policy errors. Managers are constantly trying to form expectations about the future, and fiscal policy should be a prominent consideration.
It is hard to underestimate the impact that both World Wars I and II had on the discipline of economics. During the ‘progressive era’ ...