A touch of sadness

As I read last week's edition of The Economist, I was hit by a moment of sadness. I discovered that a man had died on January 3, aged 82, who had played an important role in my studies of economics.

The man was Sir Alan Walters, described in the article as "Mrs Thatcher's monetarist guru". One of the key ideas of monetarism is that governments should not try to influence the economy through spending and taxation but should simply aim to keep inflation low by controlling the money supply.

In the early 1970s, such thoughts were economic heresy. Governments believed, in a crude Keynesian way, that they could "fine-tune" the economy and spend their way out of any problems.

A British economist, Sir Alan played a leading role in turning the opposition Conservative Party away from such policies. Shortly after Margaret Thatcher took office in 1979, Alan Walters became her special adviser.

Thatcher's monetarist policies were highly controversial and led, in the short-term, to unemployment for over 3 million. Experts still disagree as to whether this shock treatment was necessary to revive the ailing British economy.

After taking over from Keynesianism in the 1970s, monetarism is out of fashion again. To fight the current slump, Keynesian spending is needed. The money supply is also being increased dramatically, something that would no doubt have worried Sir Alan.

Sir Alan played a key role in my studies even though I never met him. He was the co-author, with Richard (Lord) Layard, of one of our standard textbooks, Microeconomic Theory.

I interviewed Sir Alan by phone in 2002 for the Head-to-Head section of Business Spotlight. He was firmly against a tax on currency speculation, the so-called "Tobin tax", named after American economist James Tobin.

Sir Alan's voice was weak, but his views were strong:

• "Most economists would agree that a Tobin tax is impractical. And when even economists say something is impractical, you know it must be! ... A Tobin tax is not only impractical; it is also undesirable. The foreign exchange market is close to the textbook model of a perfectly competitive market with many buyers and sellers. It is absurd to create a market and then to put a bit of grit into the system. Currency volatility is not necessarily a bad thing. Currencies should be allowed to float freely, so that the market determines their value. Floating currencies allow economies to respond more quickly to economic shocks and changes."