Inflation taxes your money because its value depreciates as price levels rise. Banks allow people to avoid part of that inflation tax. When banks provide credit cards to buy goods, and these are paid off at the end of the period, people can earn interest on their income deposits at the bank during the period. If that interest is as high as the inflation rate, they avoid some of the depreciation of currency that occurs from carrying around less cash during the period in which the price level rises.

Instead of carrying around currency that depreciates over the month, banks allow people to use private bank deposits for purchases and so avoid some of the inflation tax on public bank money in the form of currency. Having a well-insured bank system allows an optimal amount of inflation tax avoidance by people. Banking enables them to weigh the cost of the credit versus the amount of the inflation tax faced when using currency that depreciates.

When the bank system collapses in modern times, it can become harder to avoid the inflation tax. Even worse taxes can result, if the inflation rate is suppressed by bank regulators as they devise new means to provide insurance after the crash has already occurred. Having good bank insurance in place before a crisis is important because it can avoid the worse effects of bank panics.

Bank panics have long been a persistent feature of the US banking system. From 1873 to 1914, during the gold standard, the United States experienced a continual sequence of panics that decreased investment, leading to the creation of the Federal Reserve and, ultimately, the Federal Deposit Insurance Corporation.

The beginning of a US nationwide system of banking, in place until 1914, was created by the National Banking Acts of 1863 and 1864. Passed during the civil war to raise federal government funds, it allowed for the chartering of national banks that could issue the greenback notes, but in return for buying Treasury debt and depositing it at the Office of the Comptroller of the Currency. Banks also operated under state charters under these Acts, with their issuance of notes driven out in large part by the Acts imposing a new federal tax on state banknotes.

The Fed policy of price fixing in capital markets was part of an effort to bring reserves into the Fed. Required reserves of banks had been depleted to 1 per cent of all commercial bank deposits because of bank deregulation. With all but required reserves having been lent out before 2008, reserves had served as the foundation that the Fed provided for the aggregate money stock.

The monetary base is defined as “reserves plus currency in circulation”. The aggregate M1 is defined without reserves but with deposits at banks plus currency in circulation. The M2 aggregate and the post-2020 definition of M1 essentially equal the old M1, which included standard demand deposits, plus the money market funds that had been a part of M2. The monetary base, M1 and M2 are useful, along with the reserves alone, for investigating the stability of money demand since 1959. Specifying money demand with these different aggregates shows how money was shifted about by the long financial deregulation and the sudden refilling of reserves after 2008.

Money is used for two main reasons: as a means of exchange for goods and as a “liquid” asset for deposited funds that are invested. The liquid form of money is closely related to the exchange form, since both come from Treasury debt. When the Fed buys the Treasury debt, it creates reserves in private bank accounts at the Fed that subsequently leverage those banks’ deposits and investment when they lend out all except what is required – at least, until 2008, when the Fed's holdings of Treasury debt historically tracked the currency in circulation.

When money demand is stable, the use of it as currency, reserves and deposits is stable. With stable money demand, capital markets naturally hold less money when the cost of holding money rises. The cost of holding money rises when the inflation rate and market interest rates rise. This is especially apparent when money demand is presented as a ratio with respect to GDP output (Lucas & Nicolini 2015).

This practice is a common way to present money demand, since money demand tends to grow with output.

I have grouped American Republicans with British Conservatives because their way of thinking about the economy is similar, in the sense that they share a liberal economic heritage that is distinct from the more Christian tradition of the centre right in France, Germany and Denmark. Transatlantic links between economists and politicians are strong. Both Republicans and Conservative interviewees see the period of the Reagan and Thatcher governments as important watersheds in the movement from Keynesian to more market-conforming approaches. They confirm the judgement in much of the literature that market-conforming ideas have been more dominant in the “Anglosphere” than in continental Europe. First, I set out what the Republican interviewees say about their economic thinking and respect for economists, followed by the Conservatives. Surprisingly, given that their countries are home to neoclassical economics, they share a dismissive attitude to economists. But their reasons for being dismissive are different.

Republican context

Donald Trump was elected US president in 2016 despite many economists warning that he did not have a credible economic platform. He ended up violating sacrosanct economic principles of the Republican Party, such as free trade and balanced budgets, before his economic programme was derailed by the pandemic. I worked very hard to find Republican interviewees who wholeheartedly supported his economic policies, but most, even if they had never publicly opposed him, did not support his increased borrowing and/ or trade policies. Whether publicly for or against Trump, they saw him as a big economic departure for their party and were waiting to see what would happen next.

A degree of responsiveness to voters is necessary in a representative democracy (Dahl 1971). But the key reason that economic technocrats think politicians should cede control to experts is that they are too “responsive” to voters, who have short-term rather than long-term perspectives and do not know enough to judge what is in the interests of all. Economic technocrats see voters as forcing politicians away from delivering policy that is “responsible”. What views do politicians in the five countries share about their relationships with voters and the effects these have on their ability to deliver responsible economic policy? This chapter shows how close the relationship is: politicians see voters as “the sea in which we swim”. But it also shows that, as practitioners, politicians have insights into voters that go beyond the one-dimensional version of “giving in to voters’ demands” that tends to underpin the technocratic arguments.

“Understandably” self-interested voters

A starting point is to ask politicians what they think about voters when it comes to the economy. Do they think voters demand self-interested policies? I asked the general question “How do you think voters see the economy?”. I expected that some at least would segment groups of voters in their answers, claiming that some groups see it differently from others. But, instead, they nearly all felt comfortable with staying with the idea of voters in the aggregate, as the question had phrased it. In addition, nearly every politician, regardless of nationality or ideology, answered that voters see the economy through the lens of their own well-being – effectively, that they are narrowly self-interested. There was greater unanimity on this issue than on any other question I asked. A centrist Republican says: “I mean, voters tend to look through the economy in terms of how it's impacting them directly – right? And so, how are their pay cheques – you know, are they … rising, are they falling, is their neighbour out of a job?”

At the time of writing world leaders have just left the COP26 UN-sponsored climate change conference. The Conservative prime minister of the United Kingdom, Boris Johnson, arrived with a team of advisers from Number 10 and his chancellor of the Exchequer, Rishi Sunak, who made a speech on the economics of climate change on the conference's “Finance Day” (Sunak 2021). Sunak says his vision is for the UK to become the world's first “net-zero” financial centre, leading the way in promoting “green bonds” and encouraging firms to be more transparent about their environmental impact. Behind Sunak is a big parliamentary majority without many checks and balances, which should in theory give him and his party scope to articulate and achieve their economic goals. But, despite the UK hosting COP26, Sunak has been accused by Labour and Green Party opponents of undermining the economic drive to prevent climate change by cutting taxes on short-haul flights, and by being lukewarm on transitioning from economic dependence on fossil fuels.

We will never know whether, if Trump had won the 2020 election, he would have flown to Glasgow for COP26, or how much he would have talked about the economics of it while he was there. Although the United States has so far been the worst affected of the five countries in this study by climate change, it also starts from the lowest base of national-level measures to mitigate it. But the proportion of Republican Party politicians who argue that climate change is not happening, or that the policy approach should be nil, is declining. And the Democratic president, Joe Biden, arrived signalling action, with climate envoy John Kerry. Significantly, he also brought his secretary of the Treasury, Janet Yellen. In Congress the recent passage of the fiscal stimulus package shows that Biden may share a two-party system with the British, but he has less scope for action.

Part I shows some overall patterns in how politicians think about economists and voters across the five countries. In Part II I explore some of the ideological and national differences. I have had to take an asymmetric approach. If I had focused on a chapter for each country, it would have exaggerated the extent of national differences. I found that the centre and far-left interviewees across all five countries shared enough to warrant separating them out in a chapter on “the left”.

I selected the five countries on the basis that they reflected varieties of capitalism and varieties of style of democracy. Attitudes to economists seemed to vary according to the degree to which a country had a consensual political system, usually most obviously characterized by features such as frequent coalition government. It is beyond the descriptive nature of this book to ascertain whether the style of democracy is what causes the attitudes to economists. Other factors, such as economic conditions or intellectual cultures, may be equally important. I just note that there was a correlation. Therefore, I have grouped Denmark and Germany together, and, similarly, the two pluralist cases of the United Kingdom and the United States. However, the French interviewees were distinct in their attitudes to economists in a number of key respects, so they deserve a chapter on their own.

The final chapter in this section focuses on one aspect of politicians’ thinking: the economics of the environment. This chapter attempts to justify the stance taken throughout the book, that at least for the moment it is impossible to understand politicians’ attitudes to the economics of the environment without first understanding their attitudes to economic ideas more generally – the main subject of the book. In the same way, we cannot understand their attitude to economists who write on the environment without knowing that broader context first.

This book is based on interviews with 85 elected politicians from across the political spectrum, with some under-representation on the part of some far-right parties, who resisted being interviewed. The politicians either have economic front-bench responsibilities, whether in government or opposition, or economic committee membership, so are predisposed to be interested in economic issues. In addition, I interviewed 14 partisan economic advisers or economists attached to committees. I chose to interview some advisers to triangulate what politicians said, but my main aim was to ascertain the politician perspective. As the interviews are confidential, throughout the book I give brief details of who is being quoted, such as “German CDU/ CSU1 politician”, or “former British Conservative minister”.

At the research design and interviewing stage I kept an open mind about how far politicians might share attitudes to economists and voters and how far they might diverge, and, if so, whether in national or ideological directions. By the end of the study I was struck by how much elected politicians had in common, more than might have been expected. Therefore, Part I of the book starts with what most of the politicians seemed to share.

In Chapter 1 I set out why it is important to research politicians’ perspectives on economic policy-making given that many commentators, increasingly including progressive ones, do not believe that politicians can solve the complex economic problems we face and call for a “new technocracy”. In Chapter 2 my focus is on what politicians share in their attitudes to economists. In Chapter 3 I turn to the second area where politicians share a common approach: their attitudes to voters and the economy.

Economist Kate Raworth (2017) says that “you can't walk away from economics because it frames the world we inhabit”, but decided we need to “flip it on its head”: “What if we started economics with humanity's goals for the 21st century, and then asked what economic mindset would give us even half a chance of achieving them?” She develops the doughnut concept of boundaries, in which the hole in the middle is where people's needs are not met and the boundary beyond the edge of the doughnut is where we risk putting too much pressure on the world's resources. Drawing on numerous strands of economics, such as “complexity, ecological, feminist, behavioural and institutional eco-nomics”, her aim is to find how to meet humanity's needs. But she says it will require a fundamental transformation of the “mainstream economic mindset”, from universities to parliaments.

So far, this book has related how politicians describe their current economic mindsets. Most recount a chronological path, starting in their late teens or early twenties, of becoming interested in politics, becoming aware of their own values and predispositions and how this process affected their thinking about the economy.

In this chapter French politicians describe a cultural and institutional landscape that sets France apart from the coordinated and liberal market economy models of the other four countries in this study. Although I have discussed some aspects of French left ideas in Chapter 4, I bring other aspects of what French leftist politicians say in here so as to help us understand the perspectives of centrist and right-wing politicians and overall trends in the French approach. How do French politicians from the full range of parties interpret what “responsible” economic policies are and what the balance should be between being responsible and being responsive to voters? How do they see the role of economic experts? In line with politicians from the other four countries, I show that, despite being aware of great economic challenges, French politicians do not think it is necessary or desirable to cede more control to independent economic experts.

There is a huge body of scholarship on France's historic and distinctive pro-state-planning or “dirigiste” approach to economic policy-making. Many have debated how far France went in a more “neoliberal” direction in the early 1980s and how its neoliberal turn might have been different from that in the UK and United States. Ben Clift (2016) shows how in the “thirty glorious years” after the war there was a common education for top civil servants and politicians, to some degree separate from academic economics, sharing an underpinning belief in the value of dirigisme. In those years France's dirigisme seemed successful, and was even copied by other countries.

My overall aim was to research politicians’ economic ideas inductively, in order to describe them accurately, being relatively open about the main themes that would emerge, following an interpretivist epistemological approach (Bevir & Rhodes 2003; Cramer 2016). This book is based on the dominant themes that emerged from in-depth, semi-structured interviews with 85 elected politicians and 14 political advisers from the UK, France, Germany, Denmark and the United States. The interviews were conducted primarily by video conference, between February 2020 and December 2022.

I was responsible for the “politician strand” of a broader project exploring economic thinking. It was based in the Politics Department at University College London. I have used the first-person singular, “I”, throughout the book to reflect my responsibility for much of the research design, and for the data collection and analysis. However, as I acknowledge in the preface, the wider research team had already made some decisions, helped me make others and contributed to some of the interviewing. Therefore, in this appendix I use a mix of “I” and “we” as appropriate. I set out details about our case selection, choice of interview as method, interview design, analysis, recruitment strategy and characteristics of those interviewed.

Case selection

The research team chose Germany, France, Denmark, the UK and United States to research for two reasons. First, they are long-established democracies with varying institutional traditions in degrees of federalism, separation of powers and voting systems. Second, they have relatively well-functioning economies and some autonomy over their economic policies. They correspond both to “varieties of capitalism” (Hall & Soskice 2001), ranging across coordinated to liberal and Scandinavian categories, and to growth models (Baccaro & Pontusson 2016), ranging across consumption and export-led categories. However, as I stress in Chapter 1, the primary aim is not to focus on how different economies and political traditions may affect politicians’ economic thinking, but to describe their attitudes to economists and voters.

Why interview politicians?

The research team has heeded the call for descriptive studies of ideas to “primarily rely on direct evidence of policy actors’ ideas and belief” (Daigneault 2014: 463). Politicians’ economic ideas at the general level have been neglected.

The genesis of this book lies in a comparative research project to understand how politicians approach the making of economic policy. Although there is already a substantial body of evidence on the voter side, the economic thinking of politicians is curiously under-researched. So, we asked 99 politicians and advisers from five established democracies – France, Germany, Denmark, the UK and the United States – to talk to us. What are their economic goals, and how do they think they can achieve them? How far do they draw on economic expertise? The book is about the intense and challenging balancing act they describe having to perform, between trying to achieve their economic goals and trying to please voters. It is about how this struggle may be particularly hard when it comes to economic policy, compared with other policy areas such as social or foreign. It is about how it may be becoming even harder as we navigate the post-crash and pandemic economy combined with deepening economic pressures from climate change. However, it is also optimistic, attesting to the determination and potential of politicians to find a way through.

By way of introduction, particularly for readers who are not economists, in this Preface I introduce three core themes of the book – economists, the populist threat and expertise – by setting out how three of the politicians I interviewed talk about them. The three politicians, a German Christian Democrat, a French Socialist and a US Democrat, help define how the terms are used in the rest of the book.

The first interviewee, a German politician who lost his seat when his Christian Democratic party fell out of favour, is talking about his economic ideas. He is passionate about them and keen to get re-elected so that he can pursue pro-market economic goals, deregulating and cutting taxes. His economic ideas came from what he saw as he grew up: the struggles to reintegrate the East German economy and to modernize and decarbonize. But he also mentions many economists he has read along the way, from Adam Smith to a cluster of German ordoliberal thinkers. And, even though he never formally studied economics, he has the greatest respect for it. He gives the most comprehensive history of mainstream economic ideas and economists of all the politicians I interview in this book.

Technocrats argue that politicians ought to listen more to experts, because, in today's complex world, experts are necessary to help them deliver economic policies that can be defined as “responsible”; in the long-term interests of all. But how likely is it that politicians will agree to listen more to economic experts? A crucial consideration is how far they respect the authority of economists. I start by showing how politicians think about the starting point for their economic policies, their economic goals. At this goal level, economists do not seem to have influenced them very much. But politicians may feel the need for expert advice when they come to think about how to fulfil those goals. Here we need to explore whether they see economists as experts. I take the criteria for judging expertise: of technical knowledge, objectivity and independence. First, how far do politicians agree that economists are objective and independent? Second, I take the other criterion of expertise: technical knowledge. Do politicians find economists’ technical knowledge useful? This helps to build a picture both of how far politicians respect the authority of economists (Hirschman & Berman 2014) and of how far they have seen economists as driving economic policy up until now.

The “morality” of politicians’ economic goals

Most supporters of technocracy accept that politicians should continue to set economic goals, competing with other politicians with different goals. The politicians agree; at no point in any of the interviews do they propose that it might be legitimate for experts to set goals.

I have combined the left from all five countries because of how much they share. Their right-wing counterparts tend to follow more nationally rooted paths, which I cover in the next chapters. This chapter illustrates three themes. The first theme is the divergence in economic ideas, driven by the left. Much of the existing research into politicians’ economic goals and policy-making was conducted at the height of the neoliberal era, when many argue that centre-left goals were becoming more similar to those on the right, converging on a pro-market stance (Berman 2006; Mudge 2011, 2018). But many of these interviewees argue that, since the 2008 financial crisis, they have moved to the left (see also Manwaring & Holloway 2022). There is an increasing confidence that leftist economic ideas are gaining a wider audience, although, perhaps not unsurprisingly, left-wing politicians in Europe show greater confidence than progressive Democrats in the United States.

The second theme is how politicians on the left respect economists, but only if they belong to a particular strand of thinking. There are crucial differences between the attitudes of centre-and far-left interviewees towards economists. The centre left often follows “Keynesian” approaches, while the far left follows a mix of economists but only if they are in the heterodox category, outside the mainstream. The far-left politicians are, arguably, paying closer attention to economists than their centre-left counterparts. The differ-ences in which economists are respected reinforces the point that politicians would find it difficult to follow a technocratic path involving ceding control to economic experts in general.

Finally, many commentators have seen the left as generally more opposed to ceding control over economic policy to experts than the right. I find that the left still seems to believe that, in the current time, economic policy should continue to be contested in the political domain.

At first glance, the national and ideological chapters in Part II have shown stark differences. We go from the deep and taken-for-granted respect of politicians for economists as “scientists” among the centrists of Denmark and the right of Germany to the greater dismissiveness on the part of the Anglosphere right.

There is also an ideological divide, perhaps strongest in the four European countries. The far-left politicians across these countries are experimental, radical and heterodox. They respect some economists, but this is certainly not respect for the authority of economists as a whole, and not in the way that technocrats would see as facilitating any kind of consensus on a settled view. The far left is still wedded to contestation, as one might expect. Far-left politicians also have the greatest challenges when it comes to voters. They are proposing ideas that seem new and require a lot of dedication in time and effort to grasp. They are particularly conscious of how hard it is for them to persuade low-income voters of their environmentalist policies, which, even if they make them as progressive as possible, may nevertheless still provoke fears of potential privations on the part of those who feel let down by past economic policies. On the centre left, respect for economists is partial, since it is almost exclusively applied to Keynesianism. I posed the possibility that the French might be distinctive in their attitude to economists, respecting their plurality, a trend that might spread to other countries, but that would necessitate a wholesale reformulation of the place of economics within the context of expertise. If pluralism proceeds, economics loses its status as a science. This could lead to all sorts of benefits, but it makes it hard to argue for economic technocracy.

With the possible exception of Danish centrists, these chapters in Part II have been united, for different reasons, in pointing out how unviable economic technocracy is. They also include undercurrents that show how undesirable economic technocracy would be. The populist threat has varied in its visibility across the five countries, more noticeable in France and the United States. But in this final chapter I argue that relationships with voters more generally are a common problem for the five. The commonality of the problem relates to the morality of politicians’ economic visions and their role as elected representatives, and points to a common solution.

In this chapter I consider the attitudes of Danish and German politicians towards economists. I consider them together, because they are often categorized as “coordinated” economies, both with consensual political systems. In the case of Denmark, I focus on the politicians from all parties to show how there is a consensus on economic ideas. There is also a commonality in how Danish politicians see economists that spans across the political spectrum. However, in the case of German interviewees, I have already considered left and far-left German interviewees in Chapter 4. The attitude of the German right to economists is distinct from that of the German left; therefore, in this chapter, the focus is on the German right alone.

One feature that ties the interviewees together in this chapter is a relatively high degree of respect for economists, but of the home-grown variety only. Denmark and Germany each have councils of economic advisers that are independent of government and check on the soundness of their economic policies. The Danish councils are chaired by four university economics professors, who are often referred to as the “wise men”; one interviewee even described them as “wizards”, somewhat ironically. In Germany, two of the current members of the Council of Economic Experts are women, and they tend to be referred to as “the sages”. I found similarities in the relatively high degree of respect Danish centrist and the German right interviewees showed for these home-grown economists’ professional authority, whether “sage” or “wise”. Technocrats might argue that this Danish and German respect for experts means that they do not need to cede power to them as, by definition, they must already be delivering “responsible” economic policies. However, in the German case in particular, economic policy is becoming more contested, and there has been some shaking of faith in economic expertise.

The first question I have asked about economic technocracy is whether it is workable, whether politicians are likely to cede more control to economic experts. Crucial here is their respect for economic expertise. In this chapter, following the national and ideological variations, I return briefly to the subject of the low level of that respect overall.

There is more to say here about the second question, of whether economic technocracy would be desirable. I look again, following the national and ideological variations, at the vexed question of whether economic technocracy undermines democracy. I show that politicians seem uneasy about the damaging effects on democracy of past attempts they made to take economic policy out of the political domain and cede control to experts. Their unease supports the argument that any further embracing of technocracy could fuel populism and, by doing so, destabilize democracy. However, we need to ask why politicians were so accepting of the past attempts to take economics out of the political domain. I return to the long-standing tension, which may pre-date populism, at the heart of politicians’ relationships with voters: the mismatch between politicians’ moral economic visions and voters’ self-interest. Politicians have attempted to fudge that mismatch, not only in the past ceding control to experts but also, more broadly, in the downplaying of explanation and education in their communication with voters on economic issues. But the increased complexity of the economic issues, alongside the arrival of populism, makes it more important than ever before that politicians are more open with voters about their economic visions and make fuller efforts to explain them, reaching the Mansbridge standard of “educative” communication. In the final part of the chapter, I draw on the interviewees who believe they are already educating voters about economics in order to offer their advice as a blueprint for others as to how to educate.