Friday, March 27, 2009
Who runs the economy?
People are talking about whether the Chancellor or the Governor is now running the economy. I know what the phrase is short-hand for, but really, it get used so often I think it erodes what little vestige of economic sense the public as a whole has left.The image that the phrase conjures up is a poor old dear (or a sozzled old drunk?) who could totter over at the slightest loss of balance, and the necessity of a Wise Man in Whitehall. But that is not what it means to live in a free market economy.In one sense, we might say that no-one runs the economy. That is the point of a free market: there is no Master Mind which controls it. But in fact, there is a better answer.We all run the economy, between us. We have jobs (most of us!), we carry on a trade or provide services or manufacture stuff, and people pay us for the goods and services we supply; we then use that income to purchase goods and services which are of value to us. We save money, which banks then lend on to borrowers; we invest money, which is used to expand business and improve productivity; we give money away to charities which help others in need. The economy is the product of all those transactions, and more besides.The marvel is that out of this total unpredictability, of individuals doing what they think best in their own circumstances, we get a functioning economy. The free market is the most democratic form of economy which exists—every time money changes hands, the participants in the transaction have cast a vote in its running.