Felix Martin

In October, 2019, Mario Draghi is due to come to the end of his eight-year term as President of the European Central Bank.  He is in a race against time to avoid an unusual accolade for a central banker: never once to have raised interest rates during his tenure.

In decades gone by, central bankers expected to earn their spurs by their expert navigation of the ebb and flow of the business cycle, skilfully steering the economy between the Scylla of recession and the Charybdis of inflation with the finely-tuned tiller of interest rate policy.

For Mr Draghi, however, no such dexterity has been required.  All he has done is cut rates – eight times, from 1.5% to zero.  The reversal has never materialised.

He is far from alone.  The Bank of England’s Mark Carney has been even less busy.  In the sixty-six months Carney has been in post as Governor, the tiresome chore of adjusting interest rates has troubled him for only three of them – and the policy rate remains a mere quarter of a percent above its lowest level in three hundred years.

Yet the subdued activity levels at the ECB and the BOE are as nothing compared to the splendid lassitude of the Bank of Japan.  Not only has its current governor Haruhiko Kuroda (in office since 2013) never raised rates; his immediate predecessor Masaaki Shirawaka, whose term began in 2008, didn’t either.

This brief survey of three of the world’s premier central banks illustrates a striking fact about the current global economic conjuncture.

GDP growth, inflation, and unemployment in the world’s most advanced economies have long since recovered to historically normal levels following the crisis of 2008.  Yet their financial systems remain mired in a gigantic and unprecedented experiment – one which has resulted in a decade of monetary policy paralysis.

Recent turbulence on the world’s stock markets suggests that many investors are nervous at the prospect of the central bankers’ bringing this Great Monetary Experiment to a close.  Less fretted over – but no less problematic – are the consequences of allowing it to continue.

You can read what I think they are in my latest article in the New Statesman.

Anyone who feels gloomy about the current state of the world’s advanced economies — with their public finances groaning and their policymaking paralysed by vested interests — should spare a thought for France in September 1715.

That was the month in which Louis XIV, the Sun King of Versailles, died after 72 years on the throne and half a century of near-constant war. He left behind a necrotic economy, a treasury on the verge of bankruptcy, and a system of state finance that depended on a vast class of rentiers virulently opposed to any kind of entitlement reform. Philippe, Duc d’Orleans, France’s newly appointed regent, was at a loss for what to do.

Into this desperate situation stepped one of history’s most extraordinary, versatile, and enigmatic characters, and the subject of James Buchan’s masterly new biography — a little-known Scots gambler, adventurer, and sometime economist by the name of John Law.

I reviewed Buchan’s John Law: A Scottish Adventurer of the Eighteenth Century in the Financial Times on September 1, 2018: you can read it here.

I explain in my review that my one regret is that Buchan does not explore Law’s actual ideas in more detail.  That is a pity, because in my view Law was a visionary theorist and policy-maker, many of whose ideas are even more relevant today than they were three hundred years ago.

I therefore strongly recommend that anyone interested in Law reads not just Buchan’s biography, but also Antoin Murphy’s John Law: Economic Theorist and Policy-Maker – which remains the gold standard on Law’s theoretical and practical innovations.

A few weeks ago, President Erdogan of Turkey announced on the campaign trail that if he is re-elected later this summer, his first act will be to take control of interest rates back from the Central Bank of Turkey.

The currency markets were shocked: the Turkish lira promptly dropped by 10%.

The reason is that President Erdogan’s bold proposal flies in the face of what has been for forty years the modern consensus on the best way to conduct monetary policy.  Politicians, that consensus holds, will always be tempted to prioritise popularity at the ballot box over economic stability, resulting in boom-bust cycles ultimately detrimental to growth and employment.  The setting of interest rates should therefore be delegated, it says, to a technocratic central bank, which will have the political independence to take the longer term view.

President Erdogan, however, sees things differently.  “When people fall into difficulties because of monetary policies, who are they going to hold accountable?” he asked: “They’ll hold the president accountable.”  In a democracy, the President was arguing, it is not enough for those who make policy to be competent and effective.  When their actions determine who gets what and why, they have to have legitimacy as well; and democratic legitimacy is the one thing that technocrats, almost by definition, lack.

Who is right –  the modern consensus, with its emphasis on the need for expertise and independence; or the President, who says accountability and legitimacy should take priority?  The underlying issue is summed up in the title of this new book by Sir Paul Tucker – the former Deputy Governor of the Bank of England, and now a fellow at Harvard’s Kennedy School.  It is why, when, and how elected governments should entrust their capabilities to Unelected Power.

In my view, it is difficult to overstate the importance this question – and therefore how valuable and timely this book is.  You can read my review of it in the New Statesman magazine here.

Last weekend saw 2018’s first big conclave of the global economic policy-making elite at the Spring meeting of the International Monetary Fund’s governing board in Washington, DC.  The world’s central bankers, finance ministers, and investors gathered to hear the global financial watchdog’s latest update on the state of the world economy.

The news was positive. World GDP growth is forecast to be just under 4 percent both this year and next – stretching the global expansion into its eleventh year.  China and India, the great juggernauts of the emerging world, should grow at around 6.5 and 7.5 percent respectively.  The US – the largest economy in the world – will start to benefit from President Trump’s opening of the fiscal floodgates, and as a result, seems set to break the 1991-2001 record for its longest postwar expansion.  Even in Brexit-beleaguered Britain, the unemployment rate has just hit its lowest level since 1975.

Yet rather than reveling in this bonfire of the economic record books, expert opinion in the US capital – like the public mood across many much of the West – was strangely full of foreboding.  Amongst the general public, statistics such as those just quoted seem curiously at odds with the lived experience of a joyless recovery hallmarked by austerity and uncertainty.  The experts themselves have more faith that the numbers reflect reality.  But amongst the professional forecasters too there is a nagging sense that the good times cannot last – that there is another downturn just around the corner, and that the longer we go without a recession, the more likely it is that there will be one next year.

Are these fears of false progress and impending doom misplaced, or are we indeed living in a fool’s paradise?  Where does this mismatch between perception and reality come from?  The answer is to be found, I think, in two critical features of the global recovery since 2008.

I explain what they are in my latest article in the New Statesman, available here.

Is economics a science?  It’s an old question – and in my view, not a terribly useful one.  Yet there is of course a reason why it never stops being asked.

Physicists have discovered the universal laws governing energy and motion, and as a result can tell us with scarcely credible precision how to land a man on the moon.  Economists, by contrast, can’t even agree on why the last financial crisis happened, let alone what we should do to prevent the next one – and that’s despite the fact we wrote the rules of finance ourselves.  Real sciences make progress.  Economics, on the other hand, seems to go round and round in circles.

Needless to say, this embarrassing situation irritates economists more than anyone else.  As a result, over the past several decades, mainstream economics has attempted to assimilate itself ever more closely to the culture and methods of the natural sciences.  These days, self-respecting economists express their theories as mathematical models, not in words.  Advanced statistical techniques are deployed to test hypotheses and so resolve the answers to empirical questions.   If possible, experiments are designed and conducted.  A few of the most avant garde researchers have even gone so far as to rebrand their research groups as “labs”.

Whether these developments represent a long-overdue reform of the methodology of economics, or just the symptoms of a chronic inferiority complex, they have certainly dealt a mortal blow to one formerly central area of the economics curriculum: the history of economic thought.  If, after all, economics is a science, there is no more point in reading the economists of prior ages than there is in engaging with Aristotle on biology or mugging up the theory of phlogiston.

The publication of Linda Yueh’s The Great Economists: How Their Ideas Can Help Us Today is therefore a fascinating event for anyone interested in economics.  For this is a book which, as it title suggests, openly champions the value of studying the leading economic thinkers of the past.  You can read my review of it in the New Statesman here.

In the good old days before Brexit and the global financial crisis, politics was all so simple. The western liberal democracies had reached the “End of History”. So far as old conundrums such as ideology and identity were concerned, nobody really cared much any more. All that mattered now was to ramp up material prosperity. “It’s the economy, stupid”, as Bill Clinton apocryphally said.

It all sounds rather naive now, of course. Two and a half decades on from President Clinton’s bons mots, the world’s developed economies are wealthier than ever — indeed, more than 70 per cent larger in real terms than they were in 1992. Yet far from having achieved a nirvana of political stability, they are racked by a social strife and ideological conflict unseen in many decades.

Where did Clinton’s confident verdict go wrong? It is the Ur-question of our era, and the political convulsions of the past decade have ushered in a golden age of popular social and economic analysis intended to explain why an expanding economy is not by itself enough.

The Growth Delusion, a new book by the FT’s Africa editor David Pilling, offers a new and intriguing entry-point to this momentous debate.  You can read my review of it for the Financial Times here.

The great American financial historian Charles Kindleberger used to say that after six decades of meticulous research into the origins of speculative bubbles, he had concluded that there was but a single constant: “There is nothing so disturbing to one’s well-being and judgement as to see a friend get rich.”

Well: if any of you have friends who got in early on Bitcoin – the price of which has quadrupled in the last six months – you must be suffering from a severe loss of mental equilibrium.

Yet it is worth looking past Bitcoin as the latest get-rich-quick scheme, and focusing instead on the deeper drivers of the global fascination with the crypto-currency phenomenon.  For if he were still alive, I am sure that Professor Kindleberger would judge Bitcoin to represent the ground zero at which three of the most important historical forces at work in the world today converge.

I explain what they are, and why Bitcoin might save – rather than displace – the traditional financial system, in an article in The Daily Telegraph published on December 5, 2017.