Interview: Professor Joe Nellis
Principles of Macroeconomics
SM
Ask any manager do they know enough about the economy and
how it affects their business and they would probably say no. So to
shed light on this complex, but important subject I have in the studio
today Professor Joe Nellis who has co-authored the book Principles
of Macroeconomics with Professor David Parker.
Now, Joe, if there was one key message that you would like
managers to hear about the economy, what would it be?
JN
Well, it’s really very simple – don’t ignore it. Ignore it at your peril.
In my opinion most managers pay lip service to the economy in
terms of the business planning. I think they have really got to get
serious about it and begin to understand the economy much more
and start to factor that into the business decision making.
SM
Now probably one thing that is uppermost on people’s minds at the
moment is the credit crunch. Let’s talk a bit about that. Does
macroeconomics help in understanding the credit crunch?
JN
The answer is yes and no. That’s a typical economist answer! On
the one hand, clearly there are economic fundamentals which are
going to be determined as a result of this credit crunch – the long
term growth path of the economy. Where are we going, in other
words? Which sectors are going to feel the credit crunch most?
How long will recovery take etc?
But of course the cause of the credit crunch is not just economic; it’s
also about regulation and the behaviour of a number of
organisations, in particular the banks in terms of lending behaviour.
So that is not economics as such, but of course the two subjects do
overlap significantly.
SM
Now what I would like to do is to look at some of the key areas and
unpack some of those in relation to the credit crunch, areas that are
covered in your book.
So would you like to start off then – let’s start off with the
government and the role that the government plays. Everybody
has got some views on that, but in reality there are some hard facts
in there too?
JN
Yes. The government obviously is a major player in the economy,
it’s one of the key sectors. They take money from us and they
channel it back into the economy. So in a macroeconomic context
they are vital. In the UK they represent more than 40% of all
spending is allocated by government – funded by the taxpayer, of
Professor Joe Nellis
course. And the book, what it does, it brings together all the
sectors of the economy and highlights how they interact to create, to
determine economic activity.
In the current situation, of course, with the credit crunch, that role of
government is vital to the future of this economy. We are really
back into the era of Keynes, of course, in the terms of the role of
government as a major intervention in the economy, because clearly
monetary policy at the moment isn’t working. So we need the
government to be much more pro-active and they are being more
pro-active.
SM
Now, governments, sure they are important. What other factors do
you think that managers need to get their heads around? And I say
that advisedly because I think that most people take a look at books
like yours and say this is filled with difficult jargon, it’s really hard for
me to understand. It’s no wonder they run away from it!
So let’s have a look at some of the factors. Maybe you could
answer that first of all – this jargon that you all talk.
JN
Well first of all, I agree with you. Economics perhaps has a bad
reputation, to some extent because of the language that economists
use. I think that the really positive aspect of this book is that it tries
to demystify the language of economists. Let me summarise it
really in a very simple way.
The first half of the book – the first one third – tries to explain what
determines, what creates, what drives economic activity. And we
do that, in a way, it’s like trying to explain how a car works. What
are the factors that determine motion in a car?
And much of the rest of the book is about how to manage the
economy. Again the parallel with the car is a useful one. How do
you drive the car? But the key point to remember is that no two
people will drive a car in exactly the same way. We all have
different driving styles; some of us make mistakes – we crash, we
go in different directions, we go at different speeds. And so
governments and economists disagree sometimes – in fact most of
the time in terms of the particular driving styles, particular policies.
But most of us are trying to achieve the same objectives of long
term growth, increased living standards, lower inflation, balance of
payments that is affordable and so on.
So there is a lot to agree on, but this book tries to break economic
understanding into parts that build up slowly, as if you are building a
car, in order to create that comprehensive picture.
SM
So let’s look at these components in the car then. What is the first
big chunk of components that you would like us to grab hold of if
you were in a company?
Knowledge Interchange Podcast
Page 2
Professor Joe Nellis
JN
OK – a very straightforward question and a very simple answer. It’s
to understand what economists call the circular flow of income.
This is how the various sectors of the economy interact to create
economic activity.
In terms of the current credit crunch, actually that particular
fundamental model of the economy explains what is going wrong.
If banks don’t lend, it’s as if the blood in your body stops. The
circular flow of money – we could call it that as well. We need that
circular flow to be stimulated constantly, again and again. At the
moment that is not happening in many economy. So the circular
flow model is step one in this very detailed car mechanics course.
SM
OK, so that is step one. What is step two then?
JN
Well step two is, as I said earlier, what are the policy options to get
the system moving again? We have various options. We have
talked about the government already – they have a major role to
play and they are playing that role. Central Bank, they have
dropped interest rates almost to zero and we will get to zero.
The Exchange Rate, the currency has been allowed to fall, it has
depreciated significantly against the euro and the dollar. That will
help our exports. It will slow down imports. And of course, in
general, it’s about understanding that companies need to borrow
and invest. People do need to save, but some need to spend as
well. And so it is the complexity of that relationship which we see
day in, day out in our lives that we need to understand if we are to
understand where the economy is going next.
SM
Most businesses these days have got an international component.
I think one of the things that surprised many people is that things
going on in China, or that things going on in mortgages in the States
and so on, have affected us so much. Is there something that
would help us to understand more about that?
JN
Absolutely. Several chapters in the book deal with the international
dimension of the economy and therefore the impact on business.
Globalisation is the common phrase for this. We now have, over
the last fifty years, much greater integration of capital markets, of
goods markets, and to some extent labour markets – although
people don’t usually move across borders significantly.
And so this integration of markets has meant that the economic
determination – the economic drivers – is much more international
than ever before. And we can address that just by looking at the
sheer scale of exports, plus imports as a percentage of total
spending in an economy. And of course, it has grown significantly
over the last fifty years.
Knowledge Interchange Podcast
Page 3
Professor Joe Nellis
SM
So we have covered quite a bit of ground here, but are there any
other areas if we are assembling our car of knowledge, if you like,
that if people are really to get to grips with macroeconomics that
they need to understand?
JN
Yes. In a sense overlaying all that I have said is the area of
business cycles. We talked about the determination of economic
activity, but what causes the economy to go into a boom or into a
slump? And that is a key part of the book, towards the end of the
book in fact, because you need to understand the technical aspects,
the detail, before you really look at the overall picture.
And so business cycles at the moment – yes, clearly we are in the
downturn, but there will be an upturn. And one of the things this
book tries to do is to help us identify the signs of recovery; the early
warning signs. It’s a bit like asking will it rain next week? We have
certain ways of predicting that, we are not always correct, but on
average we hope we are more right than wrong.
And so this book has quite a technical aspect which I think
demystifies the subject to some extent and tries to explain what
causes economies to rise and fall. There is also the issue of longer
term developments – what are called Kondratieff cycles, the long
wave cycles. That is not a key aspect of this book, but of course it
is mentioned in terms of the thirty or forty or fifty year structural
changes that take place in economies.
SM
That has been very helpful in putting the car together to go that mile,
if you like, and beyond. Can you leave me with a key message that
managers really ought to understand about the macroeconomy and
that hopefully they can get something from your book on that?
JN
Well let me put it in the following way. If you ask managers how
important is the economy to the business, particularly in the current
climate, I think most will say on a scale of one to ten, its nine or ten
– it’s extremely important. In terms of the impact of growth,
inflation, interest rates, government spending, taxation, international
trade and so on. But if you then ask managers, given that
importance, how well do they understand the economy and do they
factor it into their business decision making? On a scale of one to
ten, I think they will say three or four.
And that is the key message. We know the economy is vital to the
future of businesses and therefore we need to understand it, not to
be economists, but in order to factor those economic aspects into
our longer term, and short term, decision making.
SM
Joe, thank you.
Knowledge Interchange Podcast
Page 4