Economics has been described as the dismal science - an apt name for a field that has no agreed upon definition, lacking one it is thus often the root of argument and misunderstanding.
A textbook start is a definition that sees economics as the science which studies human behaviour as a relationship between ends and scarce means, which have alternative uses. Adam Smith's famous 1776 work An Inquiry into the Wealth of the Nature and Causes of the Wealth of Nations is a macroeconomic attempt at defining the relationship that has influenced generations of economists.
The interdependence of politics and economics is a given. No government wants to impose economic ills on its people. It is also impossible to govern long under a cloud of economic woes, no matter which “ism” one follows. This is where human behaviour enters the equation, and adds to the complexities of comprehending economic theory. Roger Scruton has written that if our view of human nature goes beyond the simple supply-side economics of encouraging the provision of goods and services by mere demand; and if we believe that politics must concern itself with well being as whole, then economics cannot be considered to constitute politics. However, Scruton notes that the “curing of economic woes”, or, more specifically, the establishment and maintenance of a healthy economy must be an essential part of politics, even if only as a "precondition of its successful exercise".
Still, attempting to keep the definition of economics simple - and somewhat interesting - is a challenge that this space will not take up. Theory is one thing, but its application to reality is another, as politicians find when they attempt to govern. The permanent tendency of governments to occupy themselves with questions of economics predates Smith; direct government intervention in the economy never cures all ills, no matter how much theory is applied.
These musings were triggered by what Milton Friedman opined this week, telling the Euobserver (May 17) that he considers it to be a "strong possibility" that the 12-member euro zone could collapse "in the next few years". Estonians should pay attention - the economic policies of our government have been focused on becoming a member of the euro zone. Not only is Estonia (and the other new European EU nations) obligated to join the single currency union, our bankers and Finance Minister have been telling the world that we are ready - Estonia intends to adopt the euro fully, and as soon as possible.
For those with little interest in economics, there is a chance that Friedman's name means nothing. It should. The 1976 Nobelist in economics is arguably the most influential economist of the 20th century, though John Kenneth Galbraith and John Maynard Keynes are worthy challengers. A world renown expert on monetary and price theory as well as monetary history, Freedman is the leader of the Chicago school of economics, which stresses the importance of the quantity of money as an instrument of government policy and as a determinant of business cycles and inflation.
His role in politics has been significant. First as economic adviser for Senator Barry Goldwater during his unsuccessful run for the presidency, later as Nixon's economic main man, but most importantly, as one of the key architects of Reaganomics. As a refresher, Reaganomics is the name given to the economic theories associated with the policies of the Republican president. Among them, a vigorous attack on welfare spending, an emphasis on policies which stimulate the supply of goods and services rather than the traditional supply-side economics which focus on demand for goods and services, and, critically, a consequent effort to reduce inflation and taxation so as to cut the costs of production.
In other words, Friedman's theories expressed through Reaganomics are a repudiation of Keynesianism, which (best exemplified in FDR's New Deal) sees the government's role as having to intervene in the economy to stimulate demand. Keynes addressed the problem of unemployment (the economic issue of the New Deal/Dirty Thirties period) and his macroeconomic views are complex. Briefly, Keynes said that a capitalist economy might require government intervention at certain points; given that intervention - it just may survive.
Friedman tells the Euobserver otherwise. One may not wish to agree with him, but considering European differences - historical and present-day - it would be foolish not to listen.
Friedman conceeds that to date, the euro has done well, but feels that the entry of the ten new member states will throw off the equilibrium achieved up to now. It is difficult to have an economic union between countries that have, as the EU does, substantially different cultures, languages and economies. The Lisbon Agenda, the economic goals that the EU hopes to achieve are a pipe dream. Why? Friedman says that not only will the EU not catch up to the US by 2010, the rest of the world will not stand still. India and China are not; in fact the Nobelist believes that at China's current rate of growth the Chinese will overtake both the EU and the US.
At fault? To blame? If focusing on the negative helps to find an answer, work towards the positive, then Friedman has plenty of advice. The EU should abolish its rules and regulations. It should abolish the too-high levels of spending. Friedman says, "the European economy is too burdened with rules and regulations. There is nothing wrong with the basic strength of the individual countries. But they have burdened themselves with a range of rules that strangle their economies."
Estonian economic decisions to date have been sound. Pegging the kroon initially to the German mark, later to the euro was wise. Free-market principles have led the country to high international rankings, recognition that the country is balancing human nature with economic reality, achieving scarce ends through rational means. Joining the euro zone was inevitable in the big picture. As Friedman warns, the EU rules and regulations that Estonia has done quite well without may prove to be what brings regional economic collapse.
The crystal ball of one famous man who practices the dismal science may, on the other hand, be clouded with principles of the 1980’s that no longer apply to a changed world. Time will tell - how’s that for straddling the fence?
Leader: Dismal outlook for euro?
Arvamus
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