The Governor of the Reserve Bank of India reportedly stated that the inflation rate would be brought to its target level of 4% within 24 months. It had been above this level for 34 consecutive months already. If the prognosis is correct, by 2024 it would have remained off target for close to five years. In the United States and the United Kingdom, the inflation rate has been off target for a lesser period, but it has lately run at rates close to four times the target. What credibility do the world’s central banks have if they fail so egregiously in delivering on their mandate? Though the characteristics of India’s economy vary substantially when compared to those of the industrialised West, their governments follow the same approach to inflation control, termed ‘inflation targeting’ and implemented by their central banks. It would be reasonable to surmise then that the approach is ineffectual because it is flawed in its imagination.
A particular problem
The approach to inflation currently favoured in Anglo-American economics is the result of an evolution lasting close to a century. In the 1930s, the world faced an unprecedented crisis with the capitalist economies plunging into depression. We can now see that this was a particular problem of such economies, for the Soviet Union was unaffected. The Great Depression was as much a crisis for the economics profession, for it was expected to come up with ideas on how the global economy could be lifted out of the morass it had sunk into. The central banks were rendered helpless, for monetary policy, the preferred macroeconomic instrument, proved to be impotent under the circumstances. The profession responded momentously, through the publication by J.M. Keynes of The General Theory of Employment, Interest and Money. It provided the insight that at times, capitalist economies would require “the socialisation of investment”, by which he meant that the state would have to shoulder the burden of maintaining demand in the economy through its fiscal policy.
