Economics - The Dismal Science

The title is a quote from Thomas Carlyle who described Economics as such in an 1849 writing titled Occasional Discourse on the Negro Question (in which Carlyle was arguing for the re-introduction of slavery!)


Economics pre-Keynes was labelled Classical economics, and its main proponents were Adam Smith (remember 'the hidden hand of the market'?) as well as David Ricardo, Thomas Malthus and John Stuart Mill.


These economists believed that the market was self-correcting, and that if a problem arose in supply and demand it could be remedied without state intervention.  


John Maynard Keynes however, believed that:


1.  Economies sometimes suffer from lack of demand, which in turn leads to unemployment.
2.  That the economy itself is slow to correct issues.
3.  State intervention can kickstart demand and reduce unemployment.
4.  In certain cases, the private sector will not increase spending, and therefore the state must step into the breach.


For example, public sector (state) jobs are currently being lost in order to implement the austerity policies of George Osborne and the coalition government.  This is leading to increased unemployment.  Despite the government agreeing lending targets with the financial institutions that it had to help during the economic crisis of 2008, there has not been an upsurge in jobs created by the private sector.


This is why there was an announcement made by the Prime Minister today announcing that the Government would take on some of the risk of people applying for 95% mortgages to buy a new home.  It is hoped that by doing this, home-building levels will increase, thereby keeping a greater number of builders and tradespeople in employment.  David Cameron has today acted in a manner that would make Keynes proud.  


The question is, will it work?  It's too early to tell.  However, this is all just a sideshow distracting from what's happening in the Eurozone and US, as we wait to see which European government is the next to see its cost of borrowing rise past the magic 7% mark, and then find out who's holding all those IOUs....