Now that Alan Greenspan has so elegantly manoeuvred the American economy into the next phase of an American boom, perhaps we can all relax and contemplate on the nature of economics. There is much to be learnt from Greenspan's methods. He achieves Delphic omniscience by making apparently contradictory economic policy pronouncements. He indicated a tightening of US interest rates by hiking the Fed rate by a quarter per cent but neutralised, or rather vanquished the signal by informing the world that the Fed had loosened its stance from tightening to neutral.
In the wider context of economic policy, the Fed's exercise was meaningless. But in responding to the market's desire for tightening interest rates without damaging confidence, the Fed's move was brilliant. It pretended to do something without doing anything. That perhaps is the new paradigm of economic policy-making.
Policy-makers should do what the markets want, without forgetting the economic character of their actions. On this last occasion, the crucial issue was to allow the American boom to continue. There is no point in containing expansion when there is no inflation. That is sensible economic policy. But because the markets were agitated by an apprehension that the authorities were not in control, the Fed responded by reminding the world of their supposed muscle.
The fact is that the world needs witch doctors not because they can administer the right medicine, but because in the face of an uncertain future they can create the illusion that they have the right concoctions to cure the malady. In my analogy, the witch doctors are economists. A sharp difference between successful and unsuccessful economies is that in successful economies the witch doctors know that they are practising voodooism. They really have no clue of the consequences flowing from the medicine they are expected to administer. They, therefore, try to administer nothing.
On the other hand, in the unsuccessful economies, economic administrators actually seriously believe that their views are well conceived and rationally derived. Thus we have innumerable guidelines from over-controlled economies. They need the RBI, Sebi, the finance ministry to control all economic activity. We should perhaps console ourselves with the thought that even in developed countries there are similar mistakes. The most obvious example is the European Union with its euro, the supposedly unifying currency for mainland Europe.
In fact from the very outset this artificial props underpinning the euro and started unravelling. In dollar terms the value of the euro has steadily declined. The consequence now is that the separate countries of Euroland are now blaming each other for the currency's weakness. The Germans are telling the Italians that their loose fiscal system is responsible for undermining the euro's strength. It is only a matter of time before one of the other nations will accuse the Germans for imposing an inflexible system on the entire region.
Surprisingly there are valuable lessons on economic management to be learnt from the present performance of different economies. The first is that the fundamental need of all economies is relative plasticity of the kind that is provided by liberal economies. The second is to apply textbook solutions when matters have gone grievously wrong.
Both these points are well illustrated by the Americans and Japanese example. It is all too easy to offer many diversions to arrest the various ailments of the American economy. The classic example is the extraordinary apprehensions expressed by so many commentators of the rising American trade deficit now up to $300 billion per annum. Yet no one talks of the counterpart to the deficit that is the growing rise in foreign investment into the American economy.
