It may well be so. The election in France of President Hollande, and the success of anti-austerity parties and groups, seems to point that way.
There is no middle ground here. Only a different way of looking at the problem.
To get there however, I first wish to take you back, dear reader, to the mid-1970s when political criticisms of Keynesian demand management began to penetrate. Indeed, they weren’t so much criticism of Keynes, as to how his theories were politically interpreted. Keynes focused on the quirks of the ‘business cycle’ and commercial behaviour, especially the role of collective confidence and perceptions in creating waves of boom and recession, in turn – and the role of such waves in reducing employment. He proposed that state investment, of the type that brings a return on investment in the economy, could be managed counter-cyclically to even out the swings and maintain both confidence, and levels of employment.
The criticisms were political. They claimed that politicians would be happy to do the counter-cyclical expansion thing, but not the reduction in state investment at the top of the cycle. The criticism was that interpretations would lead to ever-expanding debt. Further, it was argued that politicians could not be relied upon to make a clear distinction between state investment with a good national return attached to it, and just general spending. It was alleged that politicians tended to make spending promises for reasons of popularity, and that therefore such distinctions tend to be fudged.
Behind these criticisms lay a set of views about other negative economic consequences of the high state spending alleged to result from these ‘misinterpretations’ of Keynes, and more generally about the poor quality of state investment (arising, for example, from a tendency to monopolise), relative to private investment. These criticisms took hold alongside a resurgence in interest in markets, competition, stable prices and monetary control. Privatisation and limited de-monoplisation resulted. However, just as Keynes was allegedly ‘misinterpreted’ as a blank cheque for political elites, markets (and Adam Smithian views) were ‘misinterpreted’ as a blank cheque for private financial elites.
Keynes never argued for growth via demand-stimulus per se. Adam Smith never argued for laissez faire – indeed, almost certainly he would have taken a very dim view of too-big-to fail monopoly banks and the ‘crony capitalism’ which resulted. But like it or not, today we find ourselves with two opposing sides, arguing against two sets of alleged misinterpretations. One lot argues for demand-led growth and the other criticises waste and debt. The other lot argue for private investment and low state spending and the others criticise austerity and demand reduction. There is, justifiably, little trust in the quality of generally expanded state spending. There is, justifiably, little trust in the growth merits of general ‘de-regulation’.
So a huge premium is attached to solving these two problems of trust and bypassing the two sets of criticisms. With new mechanisms for regulating and directing ‘communual’ funds (i.e. from the taxpayer) without the problems experienced in the past, and without boom-and-bust, neither side need be so state-funding-phobic. With a genuine drive towards improving the quality of regulation and in addressing monopoly power, (and reforming the role of the state in the economy), fears of rapacious and regressive de-regulation may be allayed.
It is time to move away from the gridlock which drowns us all. It’s time to move on. There are countries to learn from. There is work to do.
* Paul Reynolds is an independent foreign policy & international economics adviser, who has had senior political roles in Afghanistan, Iraq, and Pakistan, among other countries across the globe.