The financial crisis and the economic downturn having pushed governments to massively inject money into the economy—firstly to partly or fully nationalize financial institutions and secondly to stimulate the economy—have led both European and American populations to question the validity of the principles of the free market theory.

Guy Sorman recently published an interesting book: Economics Does Not Lie: A Defense of the Free Market in a Time of Crisis. To know more about the author and what his book is all about, I also invite you to read an interview Guy Sorman has given in July 2009: Defending the Free Market: an Inteview with Guy Sorman.

I have already given my opinion about the financial crisis and the economic downturn to this blog’s readers. In his interview, Guy Sorman mentions two things that I find interesting. When asked about the efficiency of stimulus plans and Keynesian economics, he says:

(…) Keynes suggested that government accumulates surpluses during periods of growth in order to invest them during downturns. This has never been done, though. What we have is public spending financed by public debt, which leads to an increase in interest rates, which in turn freezes the recovery. Thus, in real life, no stimulus plan has ever worked. Those mavericks who still advocate stimulus plans argue that they haven’t worked in the past because not enough money was spent. But to spend more could lead only to bankruptcy or socialism, not to recovery.(…)

Later in this interview, Guy Sorman mentions the Japanese economic policy during the 90s:

(…) Unfortunately, the nation’s economic policy between 1990 and 2000 was disastrous. The government, with lots of corruption behind the scenes, invested huge sums in useless infrastructure. Private investment was crowded out by this public stimulus, which brought the country to a standstill. This so-called lost decade is the most illustrative demonstration of the adverse effect of public spending.(…)

Economics is a human science. Reality helps validate economic models that are built upon experiences and data collected in the past. While economists can't necessarily predict what will happen in the future, they certainly can tell us what economic policies will fail.

This blog has been reprinted with permission from Celent. Nicolas Michellod is a senior analyst in Celent's insurance practice, and can be reached at nmichellod@celent.com.

The opinions posted in this blog do not necessarily reflect those of Insurance Networking News or SourceMedia.

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