Today, very often, one hears people saying that, with regard to economic policy, there is little to no distinction between what was once regarded as the ‘left’ and what was regarded as the ‘right’.
The boundaries between the two sides have got blurred as one side and then the other sought to occupy the turf of the opposing side. This has not always been so if one were to look at the last 50 years or so. The international political scenario was such that economic policy was very often assessed on the basis of political ideology. There were distinct economic policies that one would classify as left or right.
From the mid-1960s and throughout the 1970s, the economic policy based on the left political ideology was considered to be very much on top. The excesses of the military dictatorships in Latin America, the weakening of the position of the US following the debacle of the Vietnam War, and the increasing influence of what was the Soviet Union could have been the cause of this.
The election of Ronald Reagan as president of the US sought to put an end to this. The economic jargon of the 1980s was very much based on ideas such as safeguarding profits to generate further investment, containing salary increases to increase competitiveness, limiting the power of the trade unions. The economic policies of politicians like former UK prime minister Margaret Thatcher were very much based on such ideas.
Political ideology no longer influences economic thought as much as it used to
Since then, these ideas have been repeated so many times by economists, politicians and journalists that they had become generally accepted. Fast forward to 2008 and we get the worst international financial crisis in decades, followed by a severe economic recession, in turn followed by the sovereign debt crisis in a number of European countries. Now the Chinese economy is going through a period of readjustment.
This economic and financial disaster of the last eight years has caused the pendulum to swing. To think that the proponents of the left ideology have managed to change the way the world thinks would be like wishing that it were Christmas every day. What one is noting, rather, is the way institutions that are, and have been, regarded as conservative in economic thinking, have changed tack. It is these institutions that are causing the swing of the pendulum.
So what are these institutions saying? The right claims that income inequality serves as a stimulus to economic activity. It serves as a spur for richer people to maintain their position. It also serves as an incentive to poorer people to work harder.
Here comes the International Monetary Fund which states that income inequality inhibits economic growth. As if this were not enough, a leading international business newspaper stated that the trade unions are the most appropriate tool to mitigate the negative impact of automation and salaries.
Once we are now mentioning salaries, this economic indicator has become one of the most critical ones for central bankers around the world. It is no longer said that salaries need to be contained to sustain competiveness. It is now being said that salaries need to increase to stimulate demand and investment. It is the indicator that the Federal Reserve follows with most apprehension and both Mario Draghi, president of the European Central Bank, and the president of the German Central Bank (Bundesbank), Jens Weidmann, have claimed that an increase in salaries is positive for the economy.
The fundamental tenet of liberal economic theory – the maximisation of profit – is now also being challenged. The Economist spoke in favour of the anti-trust investigation launched by the European Union on global companies such as Google. It stated that the behaviour of such companies is stifling competition. A report by the White House lamented the decrease in the number of start-ups, stifled by such global companies, whose only objective seems to be to maximise profit.
The Wall Street Journal, the economic journal of the American right, complained that when companies are making too much profit, then the capitalist system is not functioning well. Moreover, these global companies are not distributing as many dividends to their shareholders as they should.
Reading about all this makes one wonder whether we have done a 180-degree turn. I do not really think so. What all this may mean is that political ideology no longer influences economic thought as much as it used to, and that we are in need of new economic thinking. Yesterday’s answers are no longer valid for today’s and tomorrow’s questions.