| Editorial |
| This issue of the Journal is much concerned with markets and money – and their regulation – which after the events of the summer might be expected. |
| However, it begins with Norman Record’s sketch for a new inquiry into the nature and causes of the wealth of nations. He starts by examining the development of what became known as ‘post-neoclassical endogenous growth theory’ – a notion which famously informed the work of our erstwhile Chancellor – and argues that its search for an endogenous increase in ‘total factor productivity’, as an explanation of the growth of output over and above the increased contributions of labour and capital, was misplaced. Instead, he suggests that we can find a more satisfactory account in the work of David Ricardo. This focuses on the accumulation of capital, and on the embodiment of – an exogenous – technological advance within that accumulation. Record goes on to construct an analysis of data for the UK from 1855 to 2005 which is consistent with Ricardo’s account. The lesson for policy makers? To aim at an increase in the rate of investment which will embody the most productive technologies. |
| One element of such a policy should be the maintenance of competition, to open the way to innovation. That was one conclusion of James Lambert from his examination of the regulation of mergers; in this he echoes the remarks of John Davies of the Competition Commission when he spoke to the Society in April. However, Lambert’s main aim is to describe the uses made of economic analysis in the decisions of the Office of Fair Trading on mergers between large enterprises, and he gives us a veritable vade mecum of the areas of application for such analysis. He believes that the practice of ‘competition economics’ – and the employment of economists in it – will increase, both by regulators and regulated. |
Terry Arthur and Philip Booth take a less kindly view of the regulation of financial markets by the Financial Services Authority. They believe that competition makes for better regulation than a statutory authority, particularly one like the FSA, accountable to the Treasury and not to investors or investment firms and institutions, and with very widely defined objectives and powers subject to little constraint.
They argue that for reasons that they believe were largely fallacious, financial markets had increasingly come under pressure to establish more formal regulation of their activities, and this had culminated in the establishment of the FSA. The central argument for regulation with which they take issue is that there has been widespread market failure which a regulator can correct.
They do not deny that financial markets have imperfections, or that there is no place for the pursuit of public policy objectives. But they believe state regulation necessarily suffers from equally damaging imperfections and that the aims and powers of any state intervention should be tightly defined. And they archly suggest that only through competition in the market between regulatory systems can we discover the best. |
| Financial markets were identified as the main source of risk to the continuing expansion of the world economy at our Annual Conference in June for which the proceedings are reported in Speakers’ Corner, although none of us knew then how soon that risk would be realised. So although the David Walton Memorial Lecture given in September by Jim O’Neill addressed the likely impacts on world financial markets of the growth of what he dubbed the ‘BRIC’ economies, much of the discussion centred on the current financial crisis in those markets. And Charles Goodhart, who kindly stepped in when Andrew Glyn was unable to speak to us in October, devoted his talk to analysing the reasons for that crisis and the responses to it. He concluded that a profound review of liquidity regulation would be needed when markets had regained their composure. |
In our Comment Column Julian Gough takes the occasion of Milton Friedman’s death to rehearse the basic monetarist argument and to conclude that money supply should not be ignored in framing monetary policy. That modest conclusion is one already adumbrated by Mervyn King in his Lecture to the Society in May. However, an altogether more powerful, sophisticated and polemical rehearsal of the monetarist case can be found in Tim Congdon’s new book which opens our Book Reviews.
It is only one of a particularly interesting selection of books, which includes works touching on monetary crises, on knowledge and the wealth of nations, on the difficulties of the state’s interventions in economic activities – in fact on all of the subjects of this issue, and more. It is enough to make an editor weep. |
| Jim Hirst, Editor |
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