[Part 4]There’s an old anecdote economists often share to illustrate the importance of economic stability. During the early 2000s, two neighbouring shopkeepers in a Southeast Asian town would open their stores every morning at 8 a.m. sharp. One sold rice, the other electronics. Then came a year of financial turmoil—currency swings, sudden inflation, political instability. The electronics shop closed within months; customers were too unsure of prices, imports became erratic, and credit dried up. The rice seller, however, held on, though even his customers began buying in smaller quantities.Years later, someone asked the rice vendor, “How did you survive when others folded?” He replied, “Because I knew every morning that the price of rice wouldn’t double overnight, that I could trust the market to behave... at least just enough to keep my door open.” That sentence stuck with economists: stability is not about spectacular growth—it's about the calm that allows ordinary people to plan, produce, and persist.Economic stability, then, is like oxygen. You don’t notice it when it’s there—but the moment it disappears, everyone starts gasping.Economic stability matters because it provides the foundation upon which all other aspects of a functioning society depend. When inflation is low, unemployment is manageable, and markets are predictable, households are more confident to spend, businesses are more likely to invest, and governments have the fiscal space to plan for long-term development. Stability creates a climate of trust: people are more willing to make financial commitments—such as buying homes or starting businesses—when they feel secure about the future.Without economic stability, uncertainty dominates. Sharp inflation, sudden unemployment spikes, or financial market crashes can erode savings, cripple small businesses, and cause widespread social anxiety. The poorest are often the first to suffer, as they lack the safety nets to weather such shocks. Instability also fuels political unrest and weakens institutions, creating a vicious cycle that makes recovery even harder.Moreover, economic stability allows governments to invest consistently in essential sectors like education, healthcare, and infrastructure. It promotes fairness and opportunity by providing a predictable environment in which people can plan, grow, and thrive. In short, stability is not just a technical goal—it is a human need. It underpins peace, progress, and prosperity.In Stabilizing an Unstable Economy (1986; reissued 2008, Yale University Press), economist Hyman P. Minsky offers a masterful critique of market excess and a passionate argument for proactive, public-sector engagement in ensuring economic stability. Drawing on his renowned “Financial Instability Hypothesis”, Minsky demonstrates that capitalist economies tend toward instability due to the cyclical nature of borrowing, lending, and speculative investment. He contends that laissez-faire financial markets, if unregulated, inevitably generate bubbles that lead to severe downturns. Therefore, true and lasting stability requires a combination of regulation, fiscal policy, and central banking oversight to counteract market tendencies toward excess and collapse. Minsky’s message is unmistakable: economic stability is not a self-correcting feature of capitalism; it must be deliberately structured and maintained through what he describes as a Big Government approach to financial governance.Hyman P. Minsky, John Maynard Keynes, and Milton Friedman each addressed the question of economic stability, but they offered very different diagnoses of the problem and prescriptions for the cure.Minsky, building upon and extending Keynesian ideas, argued that financial instability is an inherent feature of capitalism. He proposed that during periods of economic optimism, firms and investors increasingly take on risky debts. As confidence grows, so does the level of speculative and even Ponzi-style finance, until the system becomes fragile and crashes. To Minsky, markets do not self-correct; instead, they magnify risk over time. Stability, in his view, must be actively constructed through regulation, oversight, and what he called “Big Government” interventions to rein in excessive speculation and keep the system from imploding.Keynes, writing during the Great Depression, similarly rejected the idea of market self-correction. He argued that economies could fall into prolonged slumps due to lack of aggregate demand. His solution was government intervention, especially through public investment and deficit spending to stimulate demand. Unlike Minsky, Keynes focused more on employment and demand management than financial sector instability, but both believed in an active role for the state to stabilise capitalist economies.Friedman, on the other hand, saw instability as largely a policy problem, not a market flaw. He believed markets are fundamentally efficient and that past economic volatility—especially the Great Depression—was worsened by poor monetary management. His solution was a limited, rule-bound central bank, which should ensure a steady growth in the money supply and refrain from discretionary meddling. Friedman trusted the market’s self-correcting nature and warned that government interference often does more harm than good.In sum, Minsky saw instability as systemic and financial in nature, Keynes focused on demand shortfalls and employment, while Friedman emphasised the importance of monetary stability and minimal state intervention. All three cared deeply about stability—but they disagreed on whether markets could deliver it on their own, or whether the state was the necessary anchor.The following are three case studies—Greece’s debt crisis, Scandinavia’s taxation model, and Germany’s energy transition—each highlighting the tensions between competing economic priorities.
In the aftermath of the 2008 global financial crisis, Greece became a stark example of the trade-off between economic stability and employment. To secure bailout funds from the European Union and the International Monetary Fund, Greece had to adopt strict austerity measures. These policies were intended to restore fiscal discipline and regain market trust, thus stabilising the country’s economy. However, the cost was devastating. Public sector wages were slashed, pensions cut, and taxes raised—leading to mass unemployment, poverty, and a decade of economic depression. While international lenders celebrated Greece’s return to fiscal “stability,” millions of Greek citizens saw their livelihoods collapse. The Greek case shows that pursuing macroeconomic balance at all costs can deeply damage social cohesion and employment.
In Scandinavia, particularly in countries like Sweden, Norway, and Denmark, we find a different kind of economic balancing act: the tension between equality and growth. These nations operate high-tax, high-service welfare states that aim to reduce income inequality and guarantee broad access to health care, education, and social security. Critics once argued that such tax burdens would stifle economic growth. Yet, the Scandinavian model has shown that if taxes are transparent, efficiently administered, and reinvested in human capital, equality need not come at the expense of growth. These societies have maintained globally competitive economies while ensuring that citizens enjoy both upward mobility and social protection.
Meanwhile, Germany’s energy transition (Energiewende) reflects the clash between climate stability and employment. Germany has committed to phasing out nuclear energy and reducing fossil fuel dependency, investing heavily in renewable sources like wind and solar. While this transition has earned praise for environmental leadership, it has also raised concerns about job losses in coal regions and the rising costs of energy for consumers. The government has had to mediate between green ambitions and labour realities—offering retraining schemes and subsidies to regions in transition. The German case highlights that sustainability requires not just ecological foresight, but also a plan to protect jobs and ensure social stability during transformation.
Economic and political stability are deeply intertwined, often reinforcing one another in a virtuous—or at times, vicious—cycle. A stable political environment tends to foster investor confidence, efficient governance, and consistent policy implementation, which are crucial for sustained economic growth. Conversely, economic stability—characterised by low inflation, steady employment, and predictable markets—helps prevent social unrest, empowers institutions, and strengthens the legitimacy of political regimes.However, the priority between the two shifts depending on historical context, leadership goals, and the urgency of crisis. In times of economic collapse—such as a financial crisis, hyperinflation, or mass unemployment—governments often prioritise economic stability to avert widespread suffering and social chaos. For example, during the 2008 global financial crisis, many Western governments focused almost exclusively on economic recovery through bailouts and stimulus packages, even at the cost of growing political discontent.In contrast, during moments of political fragility—such as elections, national uprisings, or post-conflict transitions—leaders may prioritise political stability, even if it means delaying economic reforms. In fragile democracies, governments may maintain subsidies or avoid austerity measures to preserve popular support. Authoritarian regimes may tighten political control to project order and discourage dissent, claiming it’s essential for long-term economic planning.Ultimately, neither form of stability can endure in isolation for long. Economic prosperity without political legitimacy is brittle, while political order without economic fairness breeds frustration. The most resilient societies are those that balance both, recognising that economic justice and political inclusion are mutually reinforcing foundations of sustainable stability.A highly influential reference that illustrates the interdependence of economic and political stability is The Political Economy of International Relations by Robert Gilpin (published in 2001 by Princeton University Press). Gilpin’s work eloquently argues that states cannot sustain economic prosperity without a stable political framework, and equally, political order depends on sound economic foundations.In his analysis, Gilpin emphasises that economic systems—such as free markets or welfare states—do not exist in isolation. Their success or failure is shaped by political institutions that enforce property rights, regulate financial transactions, and mediate conflicts. A breakdown in governance, he asserts, damages investor confidence, disrupts trade, and can cascade into political unrest. Conversely, political regimes that suffer from corruption, instability, or weak institutions fail to harness economic growth and often face deeper crises.Ultimately, The Political Economy of International Relations demonstrates that economic and political stability are not separate goals but mutually reinforcing pillars. Market confidence depends on predictable political environments, while political legitimacy often rests on tangible economic performance.Who is responsible for economic stability?The responsibility for economic stability does not rest on a single actor—it is shared across multiple institutions and sectors, each playing a distinct but interconnected role. At the core of this responsibility lies the national government, particularly through its fiscal and regulatory policies. Ministries of finance and economic planning are tasked with designing budgets, collecting taxes, managing debt, and implementing public spending in ways that promote stable and inclusive growth.Equally vital is the role of central banks, such as the Bank of England, the Federal Reserve, or Bank Indonesia. These institutions are typically independent from political control and are entrusted with managing monetary policy—that is, setting interest rates, controlling inflation, and ensuring liquidity in financial markets. A central bank’s ability to prevent economic overheating or deflation is key to sustaining long-term stability.Moreover, private actors, including corporations, investors, and banks, also bear a share of the responsibility. Their decisions about wages, prices, credit, and investment shape economic outcomes. When left unchecked, speculative behaviour in financial markets can destabilise entire economies—as seen during the 2008 global financial crisis. This is why regulation and corporate accountability are essential components of economic stability.International institutions, such as the International Monetary Fund (IMF) and the World Bank, also play a role—particularly in supporting developing countries and crisis-hit nations through loans, technical assistance, and policy advice. Their influence can help stabilise economies globally, though often not without controversy.Finally, citizens themselves, through democratic participation, consumer choices, and civic pressure, can shape the broader economic direction of a country. Stability is not simply a matter of expert management—it requires public trust and shared responsibility.A compelling exploration of the responsibilities tied to economic stability is found in Éric Monnet’s Balance of Power: Central Banks and the Fate of Democracies (2023, Chicago University Press). Monnet posits that while central banks bear primary responsibility for maintaining monetary stability—through setting interest rates, controlling inflation, and ensuring liquidity—they also operate in a delicate equilibrium with democratically elected governments. He contends that, over time, central banks have assumed tremendous power (the so-called “Ph.D. standard”), managing everything from sovereign bond markets to climate-related risks. Yet Monnet also warns that unchecked central bank authority can undermine democratic accountability, urging a rebalancing of influence between technocrats and political institutions.His argument shows that economic stability is not the domain of a single actor, but arises from collaborative governance: central banks provide technical expertise to tame inflation and shocks, governments design fiscal policy, regulation, and public investment, while private actors—banks, corporations, and households—play a vital role in maintaining the system’s functionality. When one of these pillars falters, the entire edifice of stability begins to shake.When is economic stability threatened?Economic stability is threatened when the foundational pillars of trust, governance, and productivity begin to erode. This often happens during prolonged political uncertainty, when governments either cannot or will not make coherent economic decisions. A lack of investor confidence, whether due to corruption, erratic policy changes, or external geopolitical shocks, can trigger capital flight, currency depreciation, and inflation. At the same time, when the gap between the rich and the poor becomes so vast that the majority can no longer participate meaningfully in the economy, demand falters and social unrest simmers just beneath the surface. Furthermore, if a nation becomes overly reliant on a single sector—such as oil, tourism, or manufacturing—any disruption to that sector can ripple through the entire economy like a shockwave. Even natural disasters or pandemics, when unprepared for, can swiftly turn a stable economy into one grappling with chaos and contraction.One significant reference that supports this line of reasoning is Why Nations Fail: The Origins of Power, Prosperity, and Poverty by Daron Acemoglu and James A. Robinson (2012, Crown Publishing). The authors argue convincingly that economic stability is deeply intertwined with political institutions. When political power is concentrated in the hands of extractive elites who design policies to maintain their own wealth and authority, economic systems become fragile, innovation is stifled, and widespread inequality breeds discontent. The book explores historical and contemporary examples to show that nations falter economically not because of geographic disadvantage or cultural failure, but because of weak, corrupt, or exclusionary governance structures.
Another compelling resource is Globalization and Its Discontents by Joseph E. Stiglitz (2002, W.W. Norton & Company), in which the Nobel Laureate economist critiques how sudden liberalisation, deregulation, and austerity measures—especially when pushed on developing nations—can destabilise entire economies. He highlights how international institutions like the IMF often fail to consider local conditions, leading to public backlash, unemployment spikes, and social unrest that threaten economic continuity.Stiglitz explains that when developing nations are pressured—often by international financial institutions like the IMF—to rapidly open up their markets, remove regulations, and slash public spending, the results can be economically catastrophic. These policy packages, often bundled as part of structural adjustment programmes, are promoted with the promise of growth, investment, and modernisation. But in practice, Stiglitz argues, they frequently lead to economic collapse, rising poverty, and public disillusionment.Sudden liberalisation—such as opening borders to free trade without protecting nascent industries—can cause local businesses to be crushed by international competition before they’ve had a chance to grow. Deregulation, particularly in the financial sector, may invite speculative bubbles, corruption, or banking crises, especially in countries without strong legal frameworks. Austerity, meanwhile, often involves cutting subsidies, reducing healthcare or education budgets, and laying off public workers—all of which hits the poorest hardest, fuelling social unrest and weakening domestic demand.Rather than encouraging stability, these shock-therapy reforms tend to amplify volatility. Stiglitz critiques the "one-size-fits-all" approach imposed on diverse economies, arguing that it reflects not economic wisdom but ideological rigidity. In his view, true economic development must be tailored to local realities, built on strong institutions, and guided by policies that balance market efficiency with social protection.
[Part 2]
