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The 21st Century Case for a Managed Economy: The role of disequilibrium, feedback loops and scientific method in post-crash economics

The 21st Century Case for a Managed Economy: The role of disequilibrium, feedback loops and scientific method in post-crash economics

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For decades, free-market economists have told a consistent story. Markets are rational, efficient, stable and fair, and even volatile financial markets should be left mostly to their own devices. Governments, meanwhile, should maintain basic institutions but should otherwise stay out of the way. This is supposedly the only route to prosperity and the only system that is consistent with human freedom. From the late 1970s, one government after another was influenced by this perspective and our era of free-wheeling capitalism was born. The only problem is that there has never been much evidence that this kind of economy actually works. There has been no boom in productivity, aside from that brought about by new technology based on the science of earlier decades and by the entry of China and India into the global economy. And there has instead been a spiral of excess inequality and a series of financial crises that have posed an ever-greater threat to global prosperity. The reason market fundamentalism fails is simple: it is built on economic theories that incorporate only one-half of how the economy actually operates. These theories focus on a concept of long-run equilibrium that sees the economy as being continually drawn back to balance after any change from this position, in a form of what scientists would call 'negative feedback'. However, there is also 'positive feedback'; a process whereby a given change amplifies itself until the system is driven far from equilibrium, and this phenomenon is equally visible in the economy. Positive feedback drives economic growth, speculative bubbles, inflation, recessions, deflation and self-perpetuating inequality. It is what gives us the secular trends and cyclical fluctuations we observe in the real economy. And it deserves to be a central part of our economic theory. This book makes a first attempt at applying the concept of feedback to economic theory and economic policy. It finds that this perspective supports neither unrestricted free markets nor central economic planning. Instead, it supports the common-sense idea that a well-functioning economy requires a mixed economic system in which the role of the state is almost as great as that of the market. In this mixed system, as well as providing basics of law and security, government must support the feedback driving economic growth by providing essential links in the chain. It must suppress the feedback driving economic instability by controlling the money supply, regulating finance and planning taxes and expenditure so as to anchor the economy. And it must suppress the feedback driving inequality through progressive taxation and public services. These policies are all interdependent and the scientific concept of feedback therefore represents a powerful argument for social democracy.