Carney needs a Feynman moment…
Something well known to art dealers is that putting a higher price on a picture will make it sell more readily. (Last week’s auctions made me realise that it is only true at the top of the market, but that’s another story.) It’s a phenomenon that defies the standard models of price elasticity, and the explanation draws on a range of psychological and cultural factors that have no place in the equations you find in economics textbooks. Fundamentally it depends upon the sense of well-being that luxury goods offer: a picture that costs an unaffordable amount marks the collector out as powerful rather than idiotic. (Not all great collectors take this approach: Camille Groult, proud of a picture he had bought for an exorbitant sum, said he would have paid 50,000 francs to have been able to find it in a flea-market for 100.)
This thinking however doesn’t infect the Bank of England, where the new governor’s second act was to confirm that lower interest rates are here to stay.
Carney’s first act was to reassure the chair of a parliamentary women’s group that portraits of women would continue to be included on bank notes. (Jane Austen is widely considered the front runner for the next choice.) But shouldn’t he be thinking of less superficial ways in which money might be more like art? The price of money – the interest rate – is too low. So far from encouraging growth, in current circumstances this is having the opposite effect. It is not merely the obvious fact that savers feel impoverished, and do not spend; but borrowers too share the dismal gloom that is the real brake on growth. We are told that this is about facilitating investment: but what sensible project will run on 0.5% base rate, but not on say 4 or 5%? Far more important in any investment appraisal is the evaluation of project revenues, and a positive climate will more than compensate for the extra cost of borrowing.
Cynics will note that politicians’ constant emphasis on the plight of borrowers to the exclusion of the interests of savers reflects their voting power rather than aggregate volumes of money. Since what savers save is what borrowers borrow, total amounts are roughly equal and opposite: but the distribution is different, and savers are less likely to be swing voters.
The real point here is that Mark Carney, the Bank of England and our politicians remain wedded to concepts of elasticity formed and tested in different conditions. We are now in a glacial recession. They should remember what Richard Feynman demonstrated by putting a rubber band in a glass of iced water.