Sadly it appears that William Keegan, for many long years the economics editor at The Observer, has fallen victim to the problem that bedevils all too many who do some economics in their youth. They grasp the structure and relationships of the times but fail entirely to understand how structural changes change, well, change those structures.
Actually, it’s worse than this. For someone who did the mandatory minimum two terms of economics in a PPE degree in the 80s – say – the dimly remembered stuff will be what was in the textbooks then, that being what formed the views of the textbook writer that generation earlier in the 1950s and 60s. My own LSE degree in the 80s told us all of balance of payments crises and the like, the news that they can’t happen with a floating exchange rate not having penetrated establishment thought at the time.
A man in his 70s, who did economics at Cambridge in the early 60s, the most up to date influences on that degree would have been that brave new world of Keyensian internationalism of the 50s. And structures really have changed since then. It is this which explains the following from William Keegan:
In terms of the recurring themes over the period covered by these nine crises, I find two that stand out. One is the constant search by British policymakers for an economic panacea, and the second is the way that certain obsessions take over in the coverage of economics. In the 1960s and 70s the obsession was with the overseas trade figures and the balance of payments; nowadays these hardly get a mention, even though the underlying position is much worse than it was then.
The balance of payments hasn’t mattered since 1979 – with an interregnum when we shadowed the DMark and again in the EMS. The balance of payments, by definition, always balances. The thing which enables it to balance is the changing price of the local currency. If you attempt to fix that currency value then you can indeed get strains in capital inflows and outflows as against the current account balance of imports and exports. That is, it’s the price fixing which unbalances the supply and demand bit.
This isn’t odd economics nor neoliberal nor anything like that. It’s a simple application of those first couple of pages to every textbook where those supply and demand curves are introduced. Price is the third and vital component. We’re just applying that to that international balance of payments, that’s all.
You can’t fix all three of them, it’s like our engineering faster, better, cheaper. Pick two of three.
So, we floated the pound, stopped trying to have a fixed exchange rate. Thereby we cannot have balance of payments crises. Oh, sure, we can have all sorts of other problems as exchange rates change, sure enough, but not the sort of thing Harold Wilson had to worry about when devaluing the pound etc.
The underlying structure has changed, making all those things learned in youth irrelevant. Pity The Observer hasn’t quite grasped that as yet….