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“Did you consider the implications of your point d) being implemented successfully? Think of the EU imposing austerity measures on some spendthrift government.”

Actually it is precisely because I feel ashamed when I think so many of our member states will have to go one by one to the IMF for rescues becuase we haven’t the will to do the necessary ourselves. This makes us look more like naughty schoolchildren than anything else.

Many of the countries who are worst affected by this crisis are very, very poor, and I think the IMFs limited resources would best be used going to help the really needy.

If we aren’t able to take difficult decisions ourselves then we have no future, and maybe it would be better to recognise that now.

Did you consider the implications of your point d) being implemented successfully? Think of the EU imposing austerity measures on some spendthrift government. This could put the EU close to the IMF in the institutional (dis)popularity leagues, which in turn might then tarnish the popular perception of other EU projects even if they have nothing to do with those measures (say turkish membership which isn’t all too popular to begin with).

Regards

CurlyWurly

“I suspect we have, historically speaking, come too quickly to industrialisation and too slowly to more advanced forms of Government. There is an capability imbalance between our economic state and our politicial state.”

Well, funnily enough I like it the way you put it the first time, and a lot less the way you qualify it above. Not that I am not concerned about “freedom”, but I suspect I am a lot less worried about big government than you are. Indeed I am neither intrinsically in favour of it or against it – I leave that up to my fellow citizens who doubtless understand all that stuff rather better than I do. Basically, as an economist I am rather neutral on this topic (political systems rarely enter my analysis as such – possibly as a dummy variable for institutional quality). Empirically I can’t find the connection you are looking for.

On the other hand the state is the referee, and when the system is about to fall in – for whatever reason – under its own weight, I am rather inclined to try to find ways to stop it doing so.

“where I implied the two states (economic and political) are independent.”

Yeah, well this was the part I intuitively liked. Which all brings us back to where we started, and Paul Krugman’s point:

“You see, this isn’t a brainstorming session — it’s a collision of fundamentally incompatible world views.”

I mean, I don’t agree with many of your assumptions, although I completely defend your right to hold them. But at this point in time I am not especially disposed to participating in lengthy debates and seminars about the benefits of big goverment vs more private sector activity (curiously it is the French economy which is the most centralised in the G7 which is proving to be the most stable at the moment) and I am interested in everything not going careering off the cliff tomorrow, which is why I want them to issue EU bonds now to bail out the Italians (and you don’t), and I don’t think all this very friendly discussion has moved either of us one iota on that.

Still, it was nice talking. It has helped me pass the time as I move on with writing something on the onerous topic of why the causal arrow seems to go something like credit money – output – fiat money, and not the opposite way round (which is what Bernanke seems to believe).

Edward

I’m not sure this actually makes any sense.

Economic systems depend on political systems.

Historically, you had political systems which placed strong constraints on the economic system in use. Feudalism for example, where the peasent was tied to a given landlord and wasn’t even allowed to physically leave the location, let alone change job. Moving forward to today, we can have political systems (such as democracy) where economic behaviour is in principle entirely free (although in practise still painfully constrained via the State), or we can have systems where although the economic system is not in principle free (such as China), the current body politic deliberately permit a certain degree of economic freedom (in the Chinese case, out of enlightened self-interest, to avoid political unrest).

So, our economic state *derives from* our political state. You can’t have a capability imbalance in the original way I wrote, where I implied the two states (economic and political) are independent. Your current economic situation is what it is depending on how far you’ve managed to get with your political system, and I think the more free your economy is, the more wealth there is.

So we’ve got what we’ve got – quite a lot of wealth, it’s all very nice – given what we’ve got politically (democracy, with plenty of State interference in the market) because of the degree of economic freedom it provides.

And that’s just where we’re at.

It’s *not* like we’ve managed to make this whizzy economy but fucked up on our Government organisation. It’s actually that we’ve got what we’ve got for an economy *given* what we’ve managed to achieve for a Government organisation.

I hope we will in time adopt a free market as a mechanism through which to organise the State, which will result in a better economic state – greater production of wealth, much more individual liberty and freedom, hopefully the elimination of these boom-bust cycles.

Of course, it may not work out that way. We may find State regulation increasingly strangling the economy (which of course has concomitant reductions in individual liberty and freedom), to the point that the State is economically dictatorial – in other words, although we have a democracy, where in principle economic behaviour is free, in practise, freedom becomes so constrained that we all become much, much poorer and of course, unfree; the State needing to know a great deal about what we all do, to control the economy in the way it wants to (which means controlling *us*).

I am concerned this outcome may occur, because the broad mass of people do not understand what a free market is and what it means and cleave instinctively to a sort of mushy Keynesim, which the centralised democratic State instinctively uses to expand its budget and power. We see in the UK now the State spends 49% of our GDP. In the USA, the Federal Government owns now 30% of all land.

In a way this conversation reminds me of one which reputedly took place a century or so ago between Antonio Gaudi and Santiago Rosinyol. Gaudi, as most people are aware, was a Barcelona based architect who had plans to build a cathedral, while his close friend Rosinyol was a painter, playwright, and general Bohemian.

So Rosinyol asked Gaudi “when you gonna finish that cathedral of yours then, Antonio”, to which Guadi replied “not for a long time, maybe not for a century or two”.”Gee, that is a long time” Rosinyol replied to which Gaudi earnestly retorted “well back in the middle ages nobody blinked an eye at taking two or three hundred years to build a cathedral”.

Then Rosinyol wearily lifted his eyes and said “yes, Antonio, but will Christianity still exist in two or three hundred years?”

This is the point I think, as Keynes said “in the long run we are all dead”, but there are shorter runs we could think about. Maybe we are all headed for catastophe as a species, but do we really have to go careering off the cliff tomorrow. I was kinda having a nice Sunday, as it happens.

Well on my view the problem is much bigger than this. This is what my research is about. I am actively working the hypothesis that the uneven pace with which the demographic transition is being rolled out is largely behind the global economic imbalances we currently have. The transition regulates saving, borrowing and consumption patterns via shifting median population ages. This is why,on my view and for example, the German and Japanese economies go crash every time the rest of the world slows down (and each time the crash is louder) since they simply become more and more export dependent as their population ages as they don’t have enough people in the critical “borrowing” age groups. No easy fix here, either.

The pensions problem is a related, but entirely secondary one from a macro economic prerpsective. Indeed I would see the politicians obsession simply with pension funds as yet another example of their limited time horizons.

“I suspect we have, historically speaking, come too quickly to industrialisation and too slowly to more advanced forms of Government. There is an capability imbalance between our economic state and our politicial state.”

Well, what can I say to this, except that I suspect you may be right, but wow, this is a one-off species-relative thing, we will never be here again, which means, basically, we’ve fluffed it. At the same time this debate is as old as the hills. You can go all the way back to Pelagian and Augustine, and find the same sort of conversation going on.

So, taking one last “trago” from that now near empty bottle of cheap cognac, I think I will still head off into the storm, since I fully intend to go down with the ship, fighting, I just wouldn’t feel right with myself otherwise.