Is Europe, including the UK, destined to drown in a sea of irreconcilable debate over austerity versus growth, whilst the economic answers watch despairing from the shore ?
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.
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11 Comments
This article pretty much sums up what I have been thinking of this whole debate for the last two years
So what you mean is – anti-Keynes commentators favoured Hayek & Friedman and that whole neoliberal fantasy of free markets, while Keynesians continue to operate in facts-based reality. Got it.
Mike Cobley sums up the problem – the problem IS Mike Cobley!
The problem for those who want a more `Keynesian response` is threefold:
1. Give us the figures and projections – people forget the lower paid cliff edge
2. BRIC exists!
3. We don’t have austerity – we have a reining back of the increase
It is very annoying that the two sides of this argument mostly shout at each other without trying to identify precisely what it is they are disagreeing about.
But I have noticed that the professional economists on the growth side rarely invoke the memory of Keynes – that comes from the enthusiastic amateurs and their opponents. That’s surely right. Keynes died a long time ago and things have changed a lot – besides Keynes was pretty flexible in how he applied his prescriptions to the events prevailing at the time.
In fact the argument is mainly about three things. First what sort of multiplier would apply to additional infrastructure spending? There are reasons to doubt the “Growthists” assumption that it would be more than one. Second, how much spare capacity is there in the economy in fact? Growthists say there’s lots, which is in danger of wasting away if we don’t stimulate. Sceptics say that the pre crash economy was so unbalanced that this isn’t true (there are shades of the 1970s here – when policymakers wrongly assumed that high unemployment meant plenty of of spare capacity). Third, do debt markets function linearly, with interest rates responding proprtionately to debt and deficit levels? Growthists say that they do, and low yields now mean that we can easily borrow more. Sceptics say that debt markets can flip in an instant, and there is a flaw in the argument that goes that default risk is low because we can just print the extra money.
Let’s keep Keynes out of it, and try to focus on these and other issues where there is room to argue either side.
Interesting. I think the big problem is that that tax and future tax revenue is being used to prop up cronyism. There is nothing Keynesian about what happened in 2008 or what’s happened since. As for Smith he definitely would not have approved of free trade fundamentalism and warned against.,
@ John – yes, that’s right, its my great looming shadow that’s thrown the Coalition’s fiscal policies out of whack. Bad me, bad bad!
Actually, I’m less of a Keynesian than a radical in these matters – if we truly are facing the greatest single threat to the nation since WW2, then there should be no qualms in massive increases in tax on wealthy earners, as well as a raid on the 3/4 of a billion in liquidity that UK corporations are sitting on and doing nothing with. I mean, its the deficit, innit? Desperate times, and those with the outsized wealth (like those 400 top-earning Britons who saw their personal wealth increase by £155bn last year) should be only too eager to play their patriotic part in the great Deficit Struggle…
Ah, who am I kidding? The rich elite have lobbyists while Joe Bloggs has a lottery ticket. The corporations have the ear of the Prime Minister, while the disable get thrown overboard. The City can make the occupants of Downing Street quake in their boots with but a single press release, while sacked public sector workers have to decide between eating and rent. Bland approval of government austerity from some on this forum seems heartless and cruel, even though I’m fairly sure the writers are not cruel people. They are, however, trapped in the doctrine of obsolete economics, attitudes which forbid the notion that the the bloated rich should be challenged, and that the insatiable structures of the City should be brought to heel.
Gosh, how naive, eh? – to imagine that economic structures and corporations should exist to service society, rather than the other way round.
Ah, actually that should read 3/4 of a Trillion!
Smith wrote in his wealth of nations that wherever two or more people of the same trade gathered together, whether for the purpose of business or pleasure the result would be a conspiracy against the public. in other words although he thought that regulated capitalism – in which the state held the ring – was basically the best system, he didn’t trust capitalists to do the right thing.
Keynes also abhorred debt. He would have been appalled at the levels of both personal and private debt. He would almost certainly NOT have supported spending public money to stimulate demand. What he would probably have supported was investment in infrastructure and long term projects (Green investment?) designed to create long term employment.
Of course, it helps if those who quote Smith and Keynes have actually read what they wrote….
That got that bit right…
The problem with Keynes and his policy prescriptions is that they related to much more closed economies than exist now, where multipliers on any government spending (how many times the same spending stimulus is recycled in the national economy) would have been much higher since little would have leaked out in imports. The same cannot be said in any way whatsoever about the UK economy nowadays. What Keynes would have been arguing for, I believe, is for concerted reflation efforts by all the major economies, not just a spending splurge in the UK.
Another problem is that the classic slump that Keynes wrote about was accompanied by deflation. That is not the case today and in fact attempts to head off deflation, through QE have actually backfired, pushing up commodity prices and hence putting pressure on real living standards.
What is really holding back demand is our banking system and the lack of credit, with the balance sheets of the banks acting as sponges, sucking up demand. Until we can get to grips with that problem, probably by bypassing them altogether, the wheels of our economy are not going to get the grease they need to start turning, no matter how much Keynesian petrol we put in the tank.
@Mike Cobley
No, your voice is merely representative of a wider discernable trend that focusses more on the politics of decision-making and evades the facts which go to constructing the economic debate.
It really is extreme doom-mongering to say debt levels represent ‘the greatest single threat to the nation since WW2′ – where does the impending threat of nuclear or environmental devastation rank in your books compared to the worry of a decade of below-trend growth and the prospect of learning to cook rather than buying take-aways 5-nights-a-week?
I’ve always thought there was more which united Keynes and Hayek than divided them, and it’s in those areas where we should look for answers to the current situation.
Anyway, I thought this was a great post and worthy of the deeper appreciation brought by more discussion… please add.