THE CONFIDENCE QUESTION
What's
absent from today's economic discourse is the concept of consumer and
investor confidence in a nation's government and economy. This wasn't
always the case. As the Cambridge don John Maynard Keynes put it: "The
state of confidence, as they term it, is a matter to which practical men
pay the closest and most anxious attention". Another Cambridge
economist of his era, Frederick Lavington, identified confidence as a
key component of the business cycle. His 1922 book The Trade Cycle described the "tendency for confidence to pass into errors of optimism or pessimism", which triggers booms and busts.
To
see how misguided economic theories have laid waste to confidence
lately, look at Argentina. Consumers, investors and businessmen are
gloomy, fed up with the government's policies. Foreign direct investment
has fallen 66% in the last year. The economy is flat, rising just 0.9%
in this year's first quarter, compared with the first quarter of 1999.
There are even dire warnings of debt default.
Argentina suffers
from a lack of confidence. The only way to cure it is with a big bang,
as Thatcher did in Britain. Cut taxes and government spending to start.
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