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Economic Policy and Growth
The policy measures already discussed can be used to influence the various factors which determine growth. Fiscal and monetary measures can be used to stimulate private investment and public investment, research and development may be encouraged by grants and tax allowances, and the government can enlarge and improve educational and training facilities. It also has the ability to maintain demand at levels which encourage firms to expand their capacities.
If growth were the only objective of economic policy, there is little doubt that it could be achieved. But we know that governments are faced with the problem of conflicting objectives. In the UK, these conflicts have been particularly acute and for much of the post-war period aggregate demand has been managed with a view to dealing with balance of payments problems and escalating inflation. In fact, for much of this period output has grown at a slower rate than the country's productive potential.
The use of demand management techniques to deal with inflation and external deficits resulted in a series of 'stop-go' phases. Deflationary measures were applied to slow down the rate of inflation or to reduce the level of imports and they were relaxed when unemployment rose to politically unacceptable levels. Stop-go policies, how ever, are not likely to encourage those attitudes and expectations which are conductive to economic growth. If business people become convinced that any expansionary phase will be short-lived, they will not undertake the longer term investment projects which would increase the nation's productive capacity. When there is a lack of confidence in the ability of the government to carry out a sustained programme of expansion, any speculation in shares and property rather than industrial investment.
Workers too are unlikely to be receptive to changing practices and techniques, many of which cause redundancies, unless they are convinced that sustained growth will generate new job opportunities.
The government may also find it difficult to persuade people to accept the sacrifices which a faster rate of economic growth demands. If people have a very strong time preference it will require very high rates of interest to persuade them to forgo current consumption (i.e. to save and lend more). Likewise a movement of resources from the creation of social capital to the production of more industrial capital may be strongly resisted. If the economy is fully employed, any attempt to raise the rate of economic growth must entail some sacrifice in terms of present living standards, otherwise measures designed to increase investment will simply give rise to inflation.
Countries like the UK, which are heavily dependent on imported materials, face another serious problem when trying to raise the rate of economic growth. An expansion of investment brings about an immediate increase in imports (materials and machinery) and since there is unlikely to be an immediate increase in exports, then, unless the country is enjoying an export surplus, the likely effect is a deficit on the balance of payments.
If a deficit does arise and the foreign currency reserves are inadequate to deal with it, or the government is not prepared to allow the necessary depreciation of the currency, imports will have to be cut and the growth objective abandoned.
Why economists disagree
It is often said that economics cannot be a science because no two economists agree on any economic problem. This is an exaggeration, but it is certainly true that economists disagree. Disputes among economists often arise from problems of definition and from the inadequacy of statistical data. For example, the statement 'The unemployment rate in the USA is much higher than that in the UK' may be based upon the official figures issued by the authorities in these countries, but that does not mean that the statement cannot be disputed.
The numbers unemployed may refer to those people who actually register themselves as available for work, or it may represent all those who would take a job if one became available. This latter group would include a large number of people (e.g. married women) who do not normally register themselves as unemployed. In fact, the figures for the UK and the USA are collected on these very different bases so that official unemployment rates are not strictly comparable and the real differences between them may be disputed.
Although statistical information on economic affairs is now available to a far greater extent than ever before, there are still many deficiencies. Such information often takes a long time to become available in processed form, and often it is too late to be used in current analysis. It may often be presented in a form which is not very convenient for analysis, as the example above demonstrates. These deficiencies, therefore leave room for disagreement among economists.
Economics is a very young science, and although economic analysis has made great strides in recent years, there is still a great deal about the workings of the economic system which is imperfectly understood. There are many implications of existing theories which have not yet been tested, either because insufficient time has elapsed to provide adequate data, or because no one has found a satisfactory way of testing them. Technical and economic changes also bring about changes in economic behaviour so that assumptions about human behaviour which served as useful bases for predictions at one period of time may become increasingly unreliable as the social and economic environment changes. Economists, then, will be in dispute over the adequacy of certain existing theories — but it is these very disputes which lead to improvements in existing theories and the development of new ones.
The main area of disagreement among economists is on matters of economic policy. This is exactly what one would expect because policy statements are normative statements. They are value judgements. The determination of policies lies in the province of politics; it is the politician's function to decide policy matters. The economist's role in policy making is to act as an adviser, using specialist knowledge to provide policy makers with an analysis of the likely economic effects of the policy proposals. The economist, as such, has no more right to decide policies than the lorry driver, the shop assistant, or the artist. We must recognise, however, that economists, like everyone else, will have their own personal viewpoints on what is 'best' and we must, therefore, expect them to disagree on policy questions such as the desirability of Britain's membership of the Common Market, or the likely effectiveness of an incomes policy. What we have to recognise, however, is that when economists pronounce on the desirability of any economic policy they have moved out of the field of economic analysis they are making a value judgement.
Is economics a science?
Economic analysis is based upon the procedures described above, and, to the extent that the economist makes use of scientific method, economics may be described as a science. The subject matter of economics, however, is human behaviour and this is much more difficult to predict than the reactions of inanimate matter. Economists, like other social scientists, cannot achieve the precision of the natural scientists and they are denied the use of many of their techniques. Many people argue that these differences are so fundamental that economics cannot be regarded as a 'true' science. Others would say that the differences are not fundamental but merely differences in the degree of accuracy attainable.
The most obvious limitation experienced by the social scientist is that he cannot test his hypotheses by laboratory experiment. His laboratory is human society; he cannot put a group of human beings into a controlled situation and then see what happens. The predictions of economic theory must be tested against developments in the real world. Economic activities must be observed and recorded and the mass of resulting data subjected to statistical analysis. Modern statistical techniques help the economist determine the probability that certain events had certain causes. He can assess from recorded data, for example, the probability that some given increase in consumption was caused by an increase in income.
The fact that 'all people are different' is not such a handicap to the social scientist as might appear at first sight. The economist is interested in group behaviour. He is concerned with the total demand for butter rather than the amount purchased by any one individual. While the behaviour of any one person may be unpredictable, this is not necessarily true of the large group. When Arsenal score a goal at Highbury we can predict with a high degree of certainty that there will be a roar from the crowd, although we cannot forecast how, this or that individual will react. The economist is able to make generalisations about economic group (consumers, workers, shareholders) which are quite dependable guides to their expected behaviour.
Another problem facing economists is the complexity of the world they are studying — so many things are changing simultaneously. Natural scientists in their laboratories can 'hold other things constant' while they study the effects which changes in X have on Y. Economists cannot do this. They cannot vary the quantity of money in the economy, hold everything else constant, and then see what happens. What they have to do is to assume that other things remain constant. Many propositions in economics begin with the phrase 'If other things remain equal' (or the Latin equivalent ceteris paribus).
From the vast array of facts observed, economists (and other scientists) must isolate those things which are important and study them in isolation. They have to abstract from reality in order to build a simplified model of a small part of the real world which will help them to see how things are related one to another. In fact, the influences surrounding real-life situations are so many and so varied that we cannot take them all into account. All that economists can do is to try to get close to the real world by extending their model to include more and more 'other influences' — but no one can construct or understand a model which includes everything. What we are saying is that economic theories as such do not describe the real world as we see it. They attempt to show, one by one, the forces that operate within that real world. We proceed step by step from very simple models of economic reality to more and more sophisticated ones, introducing at each stage more and more of the facts of life which we can observe and experience.