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PRESENTER:
- A big hello to all of you out there joining us for the listeners' slot on Talking economics. Many of you are wondering what confidence has to do with economic theory… Brian Broke, CEO of Hassle-free Credit, would you like to answer… ?
BRIAN BROKE
- Let's just say that to act rationally, you need to have a minimum amount of confidence in the future … Otherwise, pessimism can soon spread. Without confidence there's no rationality!
PRESENTER:
- Ah! We've got Mabel on the line. This listener wants to give her view…
MABEL:
- Hello. Thanks for taking my question. What your guest has just described is what happened during the Great Depression of the 1930s, isn't it?
BRIAN BROKE:
- Absolutely Mabel. At the time, investors' confidence in the future was at rock bottom, to such an extent that the British economist John Maynard Keyes claimed it was impossible to predict the profitability of an investment. The solution he recommended to restore confidence was state intervention in the form of policies to revitalise the economy…
PRESENTER:
- Uh-oh… Something tells me that not all of your colleagues have confidence in this Keynesian stimulus model?
BRIAN BROKE:
- That's true. Other economists think that it's pointless stimulating demand when future prospects are poor and companies will avoid taking the risk of producing more. This is true of Milton Friedman, Nobel Prize winner in 1976, for whom government stimulus policies only end up causing price rises and inflation.
PRESENTER:
- In a few words, how did Milton Friedman propose to restore confidence?
BRIAN BROKE:
- Well, via an essentially monetarist policy. In other words, stabilising the currency by strictly controlling the amount of money in circulation.
PRESENTER:
- Tell us, Mr Broke, I suppose that this confidence in the future also requires people to have confidence in each other?
BRIAN BROKE:
- Absolutely. I would even say that it is absolutely necessary. In actual fact, a player can betray this confidence at any time...In this respect, I would like to refer your listeners to the work of economists and mathematicians such as John Nash – Nobel Prize in 1994
– concerning Game Theory…
PRESENTER:
- I think we're going back to Mabel now.
MABEL:
- So when it comes down to it, everyone is trying to take advantage of the confidence of others even if it means betraying them?
BRIAN BROKE:
- Not always! There are spheres of exchange or rules that everyone understands, enabling mutual confidence to the benefit of all.
- Work by Elinor Ostrom, the first woman to win a Nobel Prize for economics in 2009, has clearly demonstrated the example of how shared natural resources such as pasture land or water sources can be managed.
- But, you know Mabel, the mechanisms of confidence are highly complex and economists are still some way from having explored them of all…
PRESENTER:
- Thanks for your question Mabel. I think our listeners have got the picture. In short, nothing important can be achieved without confidence in the economy …
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