One of the most interesting, and divisive, economic thinkers of the present age is Thomas Sowell.
Mr Sowell is of African-American heritage and grew up in a single-parent household in Harlem, New York. Initially unable to finish high school for financial reasons, he later joined the army and then studied at Harvard, becoming a professor at Princeton.
Among the more influential of his ideas is that of “the general glut”. This is the idea that recessions are caused not by an absence of demand for goods and services in the economy, as advocates of Keynesian economics argue, but rather by an oversupply of goods and services.
This excess eventually leads to companies going bust, pushing unemployment upwards, a further reduction in demand, and a vicious cycle that sees the gap between supply and demand widening again.
In the years after 2010, it seemed as though the UK was heading in this direction, with Merian fund manager Richard Buxton being among those who noted that domestically and in the rest of the world, “there is an oversupply of everything except oil”.
According to Mr Sowell’s analysis, this should have led to higher unemployment in the UK, with companies cutting jobs because they were unable to sell products.
There are many UK-specific reasons why this didn’t happen, including demographic changes, with a cohort of workers born in the 1960s starting to retire en masse, freeing up jobs for those entering the labour force.
Bank of England chief economist Andy Haldane says there is another reason. He and colleagues at the BoE believe the policy of quantitative easing helped to preserve jobs. They argue that by keeping interest rates low, and pumping cash into the system, the central bank ensured companies were able to finance themselves in a cheap way, and stay in business longer, despite having profitability hit by the oversupply in the economy.
The downside of this was that those companies had little scope to raise wages, creating the counter-intuitive situation where employment is increasing but wages are not.
Unconventional monetary policy can only ever have a limited lifespan. Eventually, interest rates must rise, and when they do, the more traditional effects of a ‘general glut’ might be expected to take hold.
One longer-lasting impact on the economy of those ‘zombie companies’ being able to stay afloat is the negative effect on the long-term growth rate of the economy. This trend is less influenced by the day-to-day events of politics and public policy than by the pace of innovation in the economy.
Companies that can stay in business, but which earn little economic return, have neither the capacity nor the incentives to spend cash on ways to become more innovative, as the market for goods and services is not expanding rapidly enough.
If interest rates are rising, then innovation should be taking place. That is because the pace of economic growth is expanding, justifying an increase in expenditure on research and development, and potentially leading to a rise in the trend rate of growth.