The results of our market operation in August and our technical measures in September have been stable interest rates and financial markets that have been free of the manipulation that posed such a threat to stability and confidence over the summer. For an economy that is still working its way through its worst recession in more than a generation this is good news. Many critics, however, were shocked by what they saw as a gross violation of free-market principles in a city that had been held up as one of the world’s great models of free-market economics. We did not, and do not, see it in this way. And, six months or so after the event, now is perhaps an appropriate time to place the events of last summer in some perspective. Free markets 14. What, then, is a free market? It might be helpful to go back to basic economics to set out a few simple principles. In bald terms, a free market is a market in which buyers and sellers are free to trade on whatever terms they wish without government interference. The great writers on free markets, from Adam Smith to Milton Friedman, argue that free markets and free enterprise, rather than governments or monopolies, are the most efficient means of producing and distributing wealth and, as a consequence, the soundest basis for a just and prosperous society.
Our stabilisation policy rests on four pillars that were established in the 1990s and in 2001: the oil fund mechanism, the fiscal rule, a floating exchange rate and inflation targeting. This system was introduced against the backdrop of wide fluctuations in economic developments during the first twenty years of the oil age in Norway. Under the oil fund mechanism, increased government petroleum revenues are invested abroad, which curbs the impact of oil price swings on demand and output - and on inflation and the krone exchange rate. A floating krone exchange rate also has a stabilising effect, and the exchange rate normally appreciates in favourable periods and depreciates during adverse periods. It is easiest to express the advantage of this during adverse periods. If the krone remains at a level that is too strong, real wage growth must be lower than productivity growth in order to strengthen enterprises and employment. This only occurs when unemployment is high. With a flexible exchange rate, competitiveness may also strengthen as a result of a depreciation of the krone. A flexible exchange rate can reduce fluctuations in employment and output. The fiscal rule that provides for a steady phasing-in of petroleum revenues and the inflation target anchor expectations concerning developments in the krone exchange rate and inflation. Moreover, the fiscal rule contributes to restraining the pace at which international exposed industries are scaled back. When these policy guidelines are adhered to, they are in principle just as conducive for coping with favourable periods as with adverse periods.