Several weeks back, I had a discussion about the ideological divide, in the United States, between the Eastside (salty water) schools of economic thought, famously led by Cambridge and Princeton Universities, and the more inland schools of thought, notably led by the University of Chicago. Among the Eastside’s most popular voices is economist John Maynard Keynes.
The inland’s leading voice is economist Milton Friedman who advanced the idea of free markets. In his book, Capitalism and Freedom, which remains a major revolution of 20th century economics and political philosophy, Friedman argues governments are often wrong in seeking to protect citizens from all sorts of things, and failing to see how the ‘invisible hand’ operating in free and markets for goods, labour and information-somehow manages to offer much greater protection of personal liberty.
He even goes on to accuse the US government of being the cause of the Great Depression of 1930s through mismanagement (and not market failures). Essentially, free markets, with its self-balancing mechanism, offers greater economic protection to citizens than government interventions.
On the other hand, Keynes, Eastside’s famous figure and a golden age economic thought leader, argued that a government had a responsibility to act in periods of economic slack.
His famous joke that in bad economic times a government might as well bury banknotes in jars underground, and then employ thousands of people to dig them up, remains emblematic of his ideology.
These two economic ideologies created a polarisation of views among economists in the 1970s specifically on how to stimulate economic growth. But the polarisation debate still rages on in 2020, at such a time when the global economy is dealing with a more ruinous coronavirus (COVID-19).
Generally, in a free markets system, because the use of resources is assumed to be efficient (in the long-term), demand and employment would always take care of itself.
If there is a slack in the economy, prices would fall and low prices would trigger consumption. For instance, falling wages open a window for manufacturers to hire again. The forces of demand and supply would create a self-balancing mechanism.
But in a Keynesian world, rather than allowing the actions of production and consumption equilibrium to restore an economy back to its feet, falling wages, instead, would mean a decline in household incomes; which, as Keynes wrote, could lead to a spiral of deflation, anaemic consumption and a credit crunch.
He adds that perhaps in the long-run, the situation could correct itself but at the cost of millions of livelihoods. This is the situation governments find themselves in at the moment as coronavirus continues to spread.
Already, millions of people across Europe and Asia are under quarantine, triggering global supply chain disruptions as factories remain closed.
As I write, the entire Italy is on lockdown. Travel business has been worst hit with airlines and hospitality establishments cutting down on capacity (and laying off staff in the process). Projections of weak demand for oil saw global crude oil prices plummet to levels last seen in the early 1990s this week.
Governments of advanced economies have already sought to ramp up spending plans to cushion both demand and supply. The United States, United Kingdom and Italy have so far unveiled expanded spending plans to counter the effects of the pandemic on their economies.
Even the International Monetary Fund has asked governments to offer cash transfers, tax relief to ease coronavirus effects.
The belief underlying this level of coordinated response is that markets may not be self-correcting and need constant intervention and management, something which Friedman voices would endeavour to challenge. Perhaps the salty-water inland-water wall will never come down.