7 November 2008
Generally in economics 'long-term trends' are anything but. I was recently in a supervision session with a colleague who was describing an econometrics method used to 'explain' the behaviour of stock-market investors. It works with long data series, but these are minutes of investment decisions! So in a day you can create a really long-term trend!
For a discipline that makes great play of the differences between short, medium and long terms, economics is remarkably poor at analysing the long run. Perhaps that is because, as Keynes so eloquently noted, in the long run we are all dead. This is not a very helpful attitude for our grandchildren or the planet they hope to inherit.
In view of this prevalent short-termism what joy it was to find the long-term trend of UK (English) interest rates on the Guardian website. I would be interested to hear others' interpretations of what we can learn from these.
What immediately captures attention is that in the early phase of the life of the Bank of England interest rates are almost completely static. Is this an image we should hold in mind when thinking of the steady-state economy? A stable long-term interest rate suggests a lasting agreement about the return that the holders of capital may demand. This seems to suggest that, prior to 1800, there was little evidence of struggle over the value in the economy.
The trend becomes increasingly haywire from 1800 onwards, as industrial capitalism began in England and conquered the world. For the past 200 years we have been living on this rollercoaster with its endless economic and social conflict. The solution is not to return to the earlier phase of stable interest rates relying on an agreement that the rich man should stay in his castle and the poor man at his gate.
Surely a more fruitful solution would be to challenge the concept of interest itself. What gives a rich person the right to become richer merely because they have wealth to begin with? Removing the ability of money to store value through time would radically change the way we behave as economic actors--it is surely a prerequisite for any steady-state economy. Tweet