Up until now this series has examined the ways in which the Govt are spinning the economic facts to justify their ideological position. This time we take a closer look at the basis of the Govt’s economic position, and at an alternative, but equally valid, macroeconomic approach.

To my mind the factors which we’ve covered so far place very large question marks on the true scale of the current crisis, and the necessity for the extreme cuts which Osborne looks set to lay upon us. I’m not for one second suggesting that Govt should continue fecklessly borrowing, obviously, if it’s at all possible, they should be reducing the debt, but I think the case for the severe cuts which we’re due to see is far less clear cut than the spin doctors would have us believe.

The reverse of a Twenty Pound note, featuring Adam Smith

Adam Smith, The Father of Economics, as seen on the £20 note.

Ultimately George Osborne’s position seems to be driven as much by ideology as by necessity; one of the oddities of economics is that there are two main macroeconomic theories, and on paper they both make sense despite being largely contradictory to each other.

George Osborne appears to fall roughly into the Monetarist camp, which basically advocates that the state’s role should be solely to maintain price stability (i.e. to control inflation), while the alternative, Keynesian, view argues that the State should take a greater role in directing the economy, since left to its own devices the private sector sometimes creates less than ideal macroeconomic conditions.
In essence a Monetarist would tend to favour a “light touch” economic policy which aims to create conditions that allow the private sector to drive growth, while a Keynesian would, during times of recession or low economic growth, seek to take a more interventionary approach and would advocate increasing state spending to create jobs. This, in turn, leads to consumers having more money to spend, and thus encourages growth throughout the economy by stimulating the demand side.

The above is all a bit of a simplification. There’s a lot more to both theories, but for the purposes of this article those are, roughly speaking, the main differences between the two approaches.

Read Part 5:A road to ruin?