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PRESENTER:
- That's right folks, you're listening to Talking economics and our listeners' slot! I'll have to ask our guests to be as brief as possible because the switchboard is going crazy. It seems one question keeps coming up. Here on my card I can see that it's about economists' view concerning the need to regulate the money supply and, more broadly, the economy? Sarah Smart, head of the E2IE or European Institute for the Invincible Economy, would you like to set the ball rolling?
SARAH SMART:
- Ah… there are opposing schools of thought…But, roughly speaking, on the one hand there are those who believe in laissez-faire, in other words self-regulation of the market. And on the other, those who think that the state should intervene to stimulate demand when there's an excessive decline in growth or conversely to raise taxes when the economy is overheating…
PRESENTER:
- We've got Pauline on the line who's doing a science option at high school, is that right....Pauline?
PAULINE:
- Hello. Actually I'm doing social economics but anyway here's my question. One of your guests mentioned self-regulation of the markets but how can that work?
SARAH SMART:
- Our young listener is surely familiar with the economist and philosopher, Adam Smith, who wrote at the end of the 18th century?
PAULINE : [shy and hesitant voice]
- Er, ...he wrote The Wealth of Nations didn't he?
SARAH SMART:
- Yes, that was his best-known work...Well, Adam Smith showed that although we all act out of self interest, our actions can nonetheless be compatible between them. For instance, when demand for ice cream rises in the summer, prices rise, production increases and so the demand is satisfied! One person's interest responds to another's...A simple example of self-regulation...Everything happens as if our actions were guided by a kind of "invisible hand", an image which we owe to Adam Smith, as it happens.
PRESENTER:
- Yes? Professor Smallwage, from the review, "Highs and lows", did you want to add something?…
PROFESSOR SMALLWAGE:
- I just wanted to quote our great economist Léon Walras who established the mathematical formula for this reasoning in the 19th century. He maintained that, under certain conditions, the quantities supplied and demanded are equal on all markets thanks to price variations. This means that the economy should regulate itself without external intervention !
PRESENTER:
- Under "certain conditions" you say Professor?
PROFESSOR SMALLWAGE:
- Yes, it is as though an auctioneer set prices to ensure a balance between supply and demand on all markets...However, crises show us that it doesn't always work out that way. For instance, if unemployment is too high, demand becomes too weak.
PRESENTER:
- And this is where John Maynard Keynes comes in view of the Great Depression of the 1930s? State intervention and economic stimulus policy?
SARAH SMART:
- In this case too it doesn't always work since it's not so simple. You say that, as demonstrated by Robert Lucas, Nobel Prize winner in 1995, many economic players know, for instance, how to anticipate rising taxes due to budgetary stimulus and put money to aside instead of consuming. And that means no more measures to stimulate demand …
- Today, in reality, economic policies are aimed at ensuring a better combination of the benefits of self-regulation and regulation. As much laissez faire as possible but intervene if necessary! One must take into account increasingly globalised world.
PRESENTER:
- Thanks a lot Pauline and our thanks also go to today's three experts. Let's move onto another question…
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