Poor Policy Making and Democracy

Identification of Challenge

In my opinion, the greatest challenge facing democracy is enactment of poor monetary policies which end up increasing the cost of living for citizens and slowing general economic development. This paper specifically explores inflation, which comes about from poor monetary policies. Poor monetary policies would lead to high levels of inflation that vary widely and could impede the growth of the economy in numerous ways. There have been numerous explanations advanced to explain the cause of the great inflation in the United States in the 1960s and 1970s. Among the many reasons advanced, policy mistakes that were made make by policy makers who were otherwise will-intentioned and well-informed are credited with having led to the inflation. For students seeking economics dissertation help, this analysis offers valuable insights into the complexities of monetary policy and its impacts.

Political and social consequences could come about from formulation of poor monetary policies. The rise in the levels of unemployment, budget cuts and lower housing prices are some of the socioeconomic consequences of poor policies. The rise of new and populist parties is some of the potential political consequences of economic crises coupled with lowered stability of democratic governments, and at worst, the disintegration of party systems already in existence (Corder0 and Simon, 2016).

Political studies schools put emphasis on the establishment of stability and democracy as major factors that affect modernisation and economic development levels, the distribution of power resources and wealth, the political climate internationally among many others. Seymour Martin Lipsets claim that there exists a strong positive correlation between democracy and economic development. In line with his generalisations, the wealthier parts of societies stand better chances of establishing democracies and also withstanding it in ways that are better. in line with Lipset`s school of thought, the only factor that has influences democracy is economic development (Smelser and Lipset, 2018).

Scholars always have pointed out to the existence of a correlation that is strong between democracy and economic development. While the precise causal explanation beneath the correlation is widely contested, without doubt, there exists correlation. Increased development levels tend to be closely related to higher democracy levels. The poorer a country is, the higher the possibility of a democratic breakdown. As such, it would be expected that an economic crisis would bring about lower democracy levels.

Milton Friedman

With regard to the issue of how total spending could be managed by economic policy, Friedman led the profession away from the weight it accorded fiscal policy. His works were quite pivotal in formation of the consensus that the effects of monetary actions were more sizeable and reliable on aggregate spending in comparison to fiscal actions. Friedman strongly believed that good monetary policies had the potential of curbing inflation reasoning that budget deficits were inflationary, only if they were considerable financed through printing of money. In light of monetary policies importance for spending on aggregate, and of inflation`s total spending, Friedman advocated for policy implication. He was of the view that monetary policies were a proper and appropriate tool when directed towards the achievement of stability of prices or the rates of price change desired.

Particularly, Friedman was scathing about the cost-push theories that were quite prevalent in the 1970s and which attributed excessive inflation rates to increases in costs that were autonomous instead of excessive demand. The monetary views by Friedman on the processes of inflation led him to dismissing the income policy, that is, direct controls on prices and wages as supplements or alternatives in the fight against inflation.

From Friedman`s work, there are several lessons that could be drawn and these include; Policies should always be judged not by their intentions, but by their results

While in many ways Friedman was both a libertarian and idealist activist, practical reality always formed the basis for his economic analysis. He always maintained that the judgement of programs and policies by their intentions and not results was a mistake. Friedman was against the increasing of minimum wages because he argued that it would harm those workers who were young and low skilled. He was also against subsidies and tariffs because they harmed domestic consumers unintentionally (Nelson, 2017).

Always and everywhere, inflation is a monetary phenomenon

Friedman defied his era`s intellectual climate and reasserted the quantity theory of money as an economic tenet that was viable. He posited that in the long run, a rise in monetary growth would always end up increasing prices but would have no effect on the output. This to a large extent deconstructed the classic Keynesian dichotomy on inflation, which argued that prices would rise from either “demand-pull” or “cost-push” sources (Schwazer, 2018).

Friedman who was largely convinced that free markets had the potential of operating better on efficiency and morality grounds was a vicious critic of the powers of governments. These concepts wrap up most of the most powerful ideas to have been advanced by Milton: policies have consequences that are not intended; the focus of economists should never be on interactions but on results; superior results to crafted government decrees often come about from interactions that are voluntary between businesses and consumers.

David Runciman`s Contrasting Views

David Runciman on the other hand argues that ‘Coup,’ ‘Catastrophe,’ ‘Technological takeover,’ and ‘Something Better,’ are the main challenges that face democracy. The coup aspect touches on the possibilities of outside sources taking over formal governments. Catastrophe is related to the galvanising effects of nuclear conflict and climate change in the facilitation of political changes that are radical. According to Runciman, in the event a catastrophe was to happen, saving democracy would never be high on the list of agendas (Haynes, 2019). Runciman also explores the threats posed by technology to democracy. He acknowledges that the bids to make predictions of the future are always absurd as a result of the range of possibilities which is rather limited, encompassing technology and killer robots that anticipate human preferences without ever seeking to encourage us into imbibing new information nor seeking to expand our horizons. In the end, Runciman makes a proposal that democracy could possibly end in its form currently, and when that happens, it would be as a result of hollowed-out institutions which instead of giving the reality of democracy, give its form (Runciman, 2018).

Critics

Macpherson took Friedman to task for holding a philosophy of freedom that was overly narrow. In the opinion of Macpherson, for liberalism to be considered as humane, it must be embrace positive liberty in addition to embracing negative liberty. Positive liberty implies freedom as the capacity and powers the potentialities within a person. Positive liberty notions often tend to be characteristic of continental thinkers like Marx or Hegel or Rousseau, in comparison to liberalism that is Anglo-American. As such, while Macpherson observed that Friedman liked to refer to himself as a classical liberal, Macpherson challenged the claim by Friedman to represent the most vital element of the traditions of classical liberalism (Cunningham, 2019).

Nassim Nicholas Taleb argued that Runciman had been ignorant of the concept of convexity in his arguments. Convexity, in mathematical science, refers to a financial models non-linearity. what that implies is that whenever the price of an underlying variable change, in no way does the price of the output change linearly, but is dependent on the modelling function`s second derivative. In geometrical terms, the model ceases from being flat and becomes curved and the curv0ature`s degree is referred to as convexity.

Personal Positive Argument

There are two ways by which an inflation situation could increase the importance of act contingent motivations. First, inflation could reveal the malfunctions that are inherent to the political system and with that, trigger dissatisfaction with the political system in place. Also, such a situation always leads to a need in implementing budget cuts which go a long way in fostering dissatisfaction.

The influence of hyperinflation and inflation on democracies stability has been explored by historians and political scientists. They find the analysis of the reasoning behind the collapse and stability of democracies as a central research topic as inflation has proved to economic historians and economists. High rates of inflation have an effect primarily on societies of industrial economy that have higher modernisation levels, because agrarian societies that favour barter economy are less oriented towards markets and tend to have middle classes that are underdeveloped and who generally are considered to be supportive of democracy (Valge, 2006).

In estimation of modernisation levels, those cases in which collapses of democracy are observed at high modernisation levels need to always be pointed out. To date, modernisation political levels are defined according to the wealth and economic development levels primarily. The main reasoning behind that is that the more a society is advanced in terms of democratisation, the wealthier it is.

It is worth noting that even those democracies considered to be most established are always vulnerable to democratic erosion and breakdown eventually. This mechanism could be described as follows; inflation brings about a decline of the legitimacy of those outputs that provided by those centre parties that are already established (Fenira, 2014). The dissatisfaction amongst the citizens increases and the strength of the fringe parties grows. It eventually becomes more difficult for governments to carry out their governing. Under these kinds of conditions, the ruling parties could do everything within their means to try to limit the citizen’s impact as much as they could. With their loses already being substantial, they have far more to win and less to loose.

The motivations behind the pursuit of reforms could purely be self-interest and the focus of such motivations could be on the outcome and result of the outcome. As such, reforms serve the purpose of maximisation of the chances of remaining in office and preventing participation of citizens that is harmful, for example, in the form of embarrassing the outcomes of referendums. Alternatively, the desire and necessity to implement policies that are painful could also motivate politicians where they could cut allowances, reduce benefits and even cut the number of civil servants in the extreme cases. After all, the implementation of budget cuts could be extremely detrimental. Exclusion of citizens from the processes of making decisions could increase the chances of implementing such cuts successively.

Whenever public dissatisfaction turns into protests that are substantial. Government parties could be forced to go even further. Under circumstances like those ones, governments could end up losing part of their control to outsiders and could be forced into implementing reforms that they do not even support but which could please the masses. Reforms like those are drawn from different intermediate layers because governments still have some powers within them to apply damage control.

In different societies with higher levels of modernisation and which have been through inflation, the fall of democracies has taken different routes. However, all of the different scenarios share the characteristic instability politically that is a result of the weakness of the forces in safeguarding stability. High levels of inflation are the main cause of the latter. It however, always has to be remembered that inflation that has skyrocketed and lost control is always a suggestion of underlying problems within societies. By no means is inflation ever a choice, instead, it serves as a consequence reflecting, say, the absence of minimal consensus within societies and the state authorities control over processes that are critical. Such a dual role of inflation would render its treatment as a factor that leads to collapse of democracies as being complicated. Avoiding major inflation would imply preventing those situations that would bring it about, for example; wars, economic crises, problems in internal affairs and weak administration of state powers.

FrThere are several ways through which economic development could influence democracy. Through tightening of revolution constraints, bringing about increased inequality or simply through increasing income levels within societies. And while the primary method of measurement could be the increase in GDP, there are many other factors, like forming or productive relations that are dynamic, moving workers and firms to cities up to affecting technology and human capital. It is necessary that democracy is supported by some pre-existing conditions that are supported by economic development like urbanisation, industrialisation, widespread literacy and education, a strong middle class and wealth.

There are two factors that could possibly exacerbate the effects of inflation on democracies. One is if the levels of inflation are high enough, a situation referred to as super-inflation. A study conducted in 1996 on democratic failure cases showed that in instances where inflation rose above 30% annually, a democratic polity`s life expectancy would fall to 16 years. Another factor is the lack of growth. Those democracies that experience rates of inflation of between 6 to 30 per cent have their life expectancy pegged at 71 years. However, whenever inflation drops to below 6%, the chances of the death of a premature democracy increase. Przerwoski (2014), however, argues that while inflation actually has an effect on the sustainability of democracies, relatively, its influence is insignificant when compared to other factors like the level of wealth. According to their analysis, in poorer countries whose annual incomes per capita remained under $1,000, the average expected life of democracy would be 8.5 years.

Case Study - German

The great German inflation of 1919-1923 had a huge impact on the democracy of the Weimar Republic and on the totalitarian government`s development which was climaxed by the Third Reich by Adolf Hitler. In relation to the inflation, Baranowski (2018) posits that it was the most colossal happening of its kind throughout the history of mankind: coming next only to the Great War, and bore responsibility for the numerous political and economic difficulties that are common in German even today. The inflation destroyed most of the solid elements of the German society and in the long run, left behind an economic and moral disequilibrium that formed a breeding ground for the numerous disasters which followed.

The mark which was the currency used in the Weimar republic stabilised in the first half of 1922 at about 320 marks for every dollar. However, by the fall of 1922, German found itself in a situation where it was not able to fulfil its reparation payments because the price of gold had risen to extents they could not afford (Stern, 2018). Additionally, at this time, the mark was worthless practically and that further made it hard for German to purchase gold or foreign exchange using the paper marks. Rather, goods like coal were used to pay reparations. Troops drawn from Belgium and France occupied the industrial region of Germany, Ruhr, in the Ruhr valley in a bid to ensure that the reparations were paid. The striking of the workers in the Ruhr further exacerbated the inflation and the government of Germany resorted to printing additional money in a bid to continue paying for their resistance that was passive. As of November 1923, the US dollar was equal to 4.2 trillion German marks. One loaf of bread cost 1 mark in 1919 and the same loaf cost 100 billion marks by 1923. A short period of economic recovery was witnessed between 1923 and 1929, even though the Great Depression that was witnessed in the 1930s brought about a recession worldwide. Particularly, Germany was affected greatly because it heavily relied on loans from the Americans. The Weimar Republic was blamed for this mess and that became apparent when the political parties from both the left and the right wanted to disband the Republic altogether and that made it hard for any democratic majority within parliament. The economy of Germany was greatly damaged by the reparations as it discouraged market loans and as a result the government of the Weimar Republic was forced to print more money an action that brought about hyperinflation (Evans and Geary, 2015). The German industry collapsed when the country could not acquire any more loans and that ended up increasing the levels of unemployment. There was a huge increase in the number of unemployed people in the winter of 1929 – 1930 from 1.4 million to 2 million. By January 1933 when Hitler became Chancellor, out of every three Germans, one was unemployed. At this time the number of unemployed people had risen to 6.1 million. With this the Germans notably began losing faith in democracy and turned to extreme parties on both the Right (the Nazis) and the Left (the communists) for solutions that were quick and simpler.

The German Chancellor Herman Müller resigned in March 1930 when his government could no longer reach an agreement on the best ways through which to tackle the increased spending of the government that had been brought about by the increased levels of unemployment. Heinrich Brüning replaced him but his policies were also not effective in dealing with the crisis of unemployment and that further undermined the faith the Germans had in democracy. Some of the policies that Heinrich Brüning implemented included cutting of the expenditure of the government, unemployment pay and wages. These policies, however, were not effective and they led to the continued spiral decline and more unemployment cases were observed. The people who had lost their jobs ended up becoming even poorer. Heinrich Brüning, however, could not get the Reichstag into agreeing to his actions and as such, President Hindenburg resorted to making use of Article 48 of the constitution of the Weimar Republic which bestowed powers upon the president with which he could pass laws by decree. That went a long way in further undermining democracy and weakening the Reichstag`s power and arguably opened the way for the dictatorship that later reigned the country under Adolf Hitler.

Milton Friedman challenged the contemporary notions of deficit spending and made suggestions that in the long run, only inflation and disco-ordination would come about from expansionary monetary and fiscal policies. He made arguments for increase of the supply of money that was slow and steady, smaller governments and free trade. From the Milton Fieldman`s point of view, one can deduce that governments that have been democratically elected could put in place wise and well thought out policies could do away with inflation.

References

• Baranowski, S., 2018. The Collapse of the Weimar Parliamentary System. A Companion to Nazi Germany, pp.63-76.
• Cordero, G. and Simón, P., 2016. Economic crisis and support for democracy in Europe. West European Politics, 39(2), pp.305-325.
• Cunningham, F., 2019. Neoliberalism. In The Political Thought of CB Macpherson (pp. 95-115). Palgrave Macmillan, Cham.
• Evans, R.J. and Geary, D., 2015. The German Unemployed (Routledge Revivals): Experiences and Consequences of Mass Unemployment from the Weimar Republic to the Third Reich. Routledge.
• Fenira, M. (2014). Democracy: A Determinant Factor in Reducing Inflation. 2nd ed. [eBook] Nabeul: International Journal of Economics and Financial Issues. Available at: https://dergipark.org.tr/download/article-file/362867 [Accessed 1 May 2019].
• Haynes, J., 2019. How democracy ends, by David Runciman.
• Hofmann, K., 2018. Sovereignty and democracy, with a look at David Runciman’s how Democracy Ends. Global Intellectual History, pp.1-7.
• Lothian, J.R., 2016. Milton Friedman’s Monetary Economics. Milton Friedman: Contributions to Economics and Public Policy, p.178.
• Nelson, E., 2017. Reaffirming the Influence of Milton Friedman on UK Economic Policy.
• Przeworski, A., 2014. The state and the economy under capitalism. Routledge.
• Runciman, D., 2018. How democracy ends. Basic Books.
• Schwarzer, J.A., 2018. Retrospectives: Cost-Push and Demand-Pull Inflation: Milton Friedman and the" Cruel Dilemma". Journal of Economic Perspectives, 32(1), pp.195-210.
• Smelser, N.J. and Lipset, S.M., 2018. Social structure, mobility and development. In Social structure and mobility in economic development (pp. 1-50). Routledge.
• Stern, J., 2018. Helene Stöcker, Weimar Germany and Prophylactics: An Investigation into the Context and Effects of the Reichsgesestz zur Bekämpfung Geschlechtskrankheiten.
• Valge, J. (2006). Inflation as a Cause for the Downfall of Democracy. 87th ed. Helsinki.