The Office of National Statistics recently reported that the British economy has grown by only 0.5% over the past year: private sector demand is depressed by deleveraging and uncertainty, while public sector demand is constrained by the government’s austerity strategy. Britain needs to rebalance its economy away from reliance on credit-fuelled private consumption and towards investment and exports. And the public has lost confidence in banking as a socially useful activity.

 

A British Investment Bank (BIB) presents a potential solution to these problems. Robert Skidelsky at the Centre for Global Studies and Felix Martin at Thames River Capital invited leading figures from the British private and public sectors, as well as

There’s a lot of support for the idea of reforming economics, ever since the Queen of England asked of a group of economists in November 2008, why did no economist predict the credit crunch? Many people, including some economists, have been wondering what’s wrong with economics, whether some time back it didn’t take a fatal turning which made a lot of it wrong or useless.

 

A huge obstacle to rethinking economics is the view that it is like physics: in the double sense that human behaviour is subject to natural laws and in the sense that economics discovers these laws as it progresses from error to truth. No one really suggests we should start physics all over the again. And if economics is really like physics, we do not need to reform

In his memoirs, the British economist Lionel Robbins called his argument with Keynes over what to do about the Great Depression “the greatest professional mistake of my life”. As a Hayekian, Robbins advocated doing nothing and leaving it to natural forces to bring about a recovery. Keynes, as we know, advocated a big stimulus. Looking back on the dispute, Robbins recanted: you don’t, he said, deny a drunk who's fallen into an icy pond blankets and stimulants on the ground that his original trouble was overheating. This was in my view both good ethics and good economics.

 

There’s an interest argument though to be had between the Wicksell-Hayek and the Keynesian models of the origins of the slump. According to Wicksell-Hayek the present

The efficient market theory states that shares are always correctly priced. This assumes perfect knowledge of the 'fundamentals' which determine the value of shares. A year ago I set a little quiz to a small group of directors - seasoned veterans of financial markets. I asked them to predict the rate of inflation, annual GDP growth, 10 Year Treasury yields the price of oil a year's hence, and the share price of their company. I then compared the outcomes with the predictions. Twelve out of thirteen overstated the growth rate of the economy. All overestimated the yield of 10 Year Treasuries. Ten out of thirteen overestimated the rate of inflation. For example, the average predicted growth rate of the US economy was over 3%. In fact it was

The other day I was giving a lecture on economic policy at a well-known British independent school. I argued that an easy way of increasing total spending was for the government to issue every household with a time-limited voucher, e.g. £100 to be spent within a month. A bright student from Hong Kong then asked the following question, “If the receiver of the voucher was rational, she would realise that her taxes would have to go up by £100 in order to finance the voucher, so she would spend the voucher but increase her saving by £100. Wouldn’t this mean that no extra spending would be generated by the issue of the vouchers?”

 

After the lecture I gave the question to two economics graduates: