Opinion: Time for outdated economics to be put to bed

I have for a long time been a strong critic of modern socialists. Partly because I am a strong critic of socialism, but primarily because they are so out of sync with the modern world. When the red flag was first raised in the Merthyr uprising, it was a logical response to the appalling conditions imposed upon the world’s first industrial workers.

But now, a century and a half on, we are challenging the majority of councillors and political activists in Merthyr who still hark for their fabled socialist solution. Whilst it may have helped in the nineteenth century, socialism today would be as anachronistic and inappropriate as feudalism was then.

Now, however, it seems that it is not just socialists looking to economic ideas of the past. The recent renaissance of John Maynard Keynes may have been widely accepted, but is it any less wistfully anachronistic than Merthyr’s die-hard socialists? I feel compelled to point out at the start that Keynes died in 1946 and his General Theory of Employment, Interest and Money was published in 1936.

It is unquestionable that the world today is inconceivably different to that in which Keynes lived and worked. The Britain of the early twentieth century, that which influenced Keynes, was one in which millions were unemployed and many more lived in squalor and poverty. Those who were employed were predominantly working in heavy industry.

It was perfectly logical that the government could keep those people employed by artificially stimulating demand. If you want more people employed in coal and steel, build more railways. Today, with jobs under threat in retail and services, it is difficult to see how the government can stimulate demand in these areas. They have tried with the VAT cut, but the most this is likely to achieve is to worsen the personal debt problem.

Keynes believed in controlling the global economy, and he advocated global institutions. Keynes vision for a global economic infrastructure was, sadly, never realised. The IMF was created as a one sided tool to clamp down on developing countries that ran up deficits, but did nothing to tackle the counter problem of rich country surpluses – just as Keynes said it should. This may not sound critical, but without this check the ‘level playing field’ Keynes had sought simply could not exist. I would argue that without this central pillar, the whole global trade structure was destined to produce a biased global economy.

In the 1930s telephones were becoming common and flight was being developed. Yet the internet and global transportation has made the sharing of information and goods easier now than it was conceivable in Keynes’ day. This is significant, as there is a large emphasis on state trade in economic theory of the era. Today, trade can be carried out between small or medium businesses on opposite sides of the world. This matters because technology will inevitably lead to a weakening of the notion of a discrete national economy. Keynes’ theories depended on states and economies being congruous, so that the government could control demand and stimulus.

As well as all these material differences between then and now, Keynes completely mispredicted how society would develop. He got the rate of economic growth almost spot on, but got it completely wrong as to what we did with it. Keynes expected that economic growth would be directed in to making life easier, so that in the end, everyone would have huge amounts of leisure time. The explosion of consumerism in the last two or three decades would probably have repulsed Keynes, but it has certainly challenged his economics. Keynes’ economic models were built for providing survival for everyone, but little more.

You may think that Keynes’ sympathy for the modernist vision of lazy afternoons as your machines did all the work is a good one. But it assumes that there is a limit to useful development of technology and society, and inevitably creates a stagnant economy which doesn’t allow for new products to come to market.

So Keynes’ world was not like ours, and I propose his ideas don’t fit anymore. But even if they did, would we want them anyway? It is difficult to see how a Keynesian economy could tackle carbon emissions, or stop the ‘boom and bust’ cycle once we are out of this recession.

I am convinced that governments go for Keynes, not for the credibility of his theories, but because he says what they want to hear – there is something you can do. So now Gordon Brown has fallen for the lure of that idea, believing he can save the world from recession. Whether it will work has been discussed endlessly elsewhere, but what is essential is that after the recession, we break from Keynesian central control.

We must put communities and individuals back in the driving seat of business. All the reasons we support localism and devolution in politics, apply just as much, if not more, in economics.

The twenty-first century will be a world of power to communities and individuals, powered by a global interconnectedness. We must ensure that we have an economy that matches it.

* Kevin O’Connor is Liberal Democrat Group Leader on Merthyr Tydfil County Borough Council.

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11 Comments

  • Tristan,
    What about Eric Rauchway’s demolition of those conservatives misinterpreting the New Deal? I think that there is plenty of economics on both sides…

    Kev,
    I am not sure that we are ready to ditch all of Keynes quite yet. First of all, Keynes was no socialist and I am not quite sure why you bring up the topic (Keynes wrote one of his essays on ‘Why I am a Liberal’ in the same collection that contains ‘Economic Considerations for our Grandchildren’ that you allude to later). Keynes politics was not one of control- it was one of liberty. Essentially, all he argued was that fiscal policy could be used over and above monetary policy if we got into a deep recession and that there were psychological issues at heart. Eventually the market would correct but ‘in the end, we are all dead’. Poverty and unemployment constrain liberty. A countercyclical fiscal policy and ‘priming the pump’ when in depression will not bring the Bolshevik’s to power.
    While he was an economist, he wasn’t an economic determinist. He knew that liberals believed in human ends and that growth was a way of meeting enough needs to be able to concentrate on the really meaningful things in life. He wasn’t predicting that we would but saying that ‘avarice and usury must be our Gods a little longer’ (IIRC) before we could even hope to.

  • apologies for some awful spelling mistakes! And Tristan for ‘economists’ read ‘politics’ and it should make more sense!

  • Andrew Duffield 28th Jan '09 - 8:18pm

    At least Keynes recognised that money issued free of debt by government for spending on public goods would NOT cause inflation and would stimulate the sustainable economic growth that debt-loaded bank-created money will never do.

    We have no time for leisure (other than that enforced by cyclical unemployment) because we are all wage-slaves to perpetually rising national and personal debt – an inevitable function of gifting money creation to private banks.

    Not only does government aquiesce in this obscenity, borrowing its own currency at interest to make public services unaffordable, it taxes productive work instead of unearned speculative wealth.

    You couldn’t make it up!

    The really frustrating thing is that 100 years ago there were Liberals (like Keynes) who knew what to do about this institutionalised plunder and ineptitude. Write off economic history and its solutions at your peril.

  • “We must put communities and individuals back in the driving seat of business. All the reasons we support localism and devolution in politics, apply just as much, if not more, in economics.”

    There is no disputing that the activity of free individuals creates the economy. All comes from the bottom, the genius of the many entrepreneurs and workers who actually produce, grow and market goods. If allowed the freedom to act, save, invest, and keep the fruit of their efforts, they will by their sheer numbers and initiative create prosperous societies. There is no grand theory involved.

    Any examination of history will reveal that prosperity emerged from the few locales where such economic freedom allowed the citizenry to apply their talents to create growing economies. It goes back to Phoenicia, almost 4,000 years ago, where entrepreneurs ruled the seas and marketplaces of the known world. They did very well with no Federal Reserve or stimulus bills. So did the United States during its first 300 years of history.

    Economic theory merely attempts to summarize what such free people do when they are engaged in free enterprise. Economic theory started with Adam Smith as an attempt by acaademic elites to understand what was happening, Then they moved on to try and “manipulate” and “control” that activity of free people. And ironically, any such control or manipulation stifles the diversity and energy of their peoples’ enterprise. Thus, economic theory, harmless if confined to the ivory towers of academia, cannot when applied in the real world do much more than impede the activity of the essential ordinary people conducting their businesses. All the grand macro-economic theories are over-rated, uncertain, unproven, and have probably done more harm than good.

    The elites who seek to administer from the top by imposing such theories are opportunists that plague mature nations. All the great success stories, whether Holland, America, Hong Kong, Venice, ancient Greece and Rome, and now Singapore and Dubai– they all prospered most in their early years before new elites took over and expanded central bureaucracies that gradually stifled success and led to the decline of the once great nations.

    Every massive governmental program ia always justified by its advocates as an emergency need to help some group or other. In fact, every such call for massive governmental action only serves those who administer it. The demagogues rely on the charitable instincts of the voters to give them extraordinary power to direct and control the redistribution of wealth. Then, by distributing it to their own constituents, they control the votes to remain in power.

    The reason to put individuals and local communities back in control is no vague or complex theory–it just recognizes that that is where the creative cobnstructive action comes from. Common sense dictates that you let the people be, and severely restrict governmental encroachment over their lives and businesses.

  • Kev, sorry but you are so utterly wrong. Keynes was absolutely right about many things regarding the capitalist economy and his insights are still valid today.

    His crucial message was the role that expectations play in the economy. Who today can deny that in lowering interest rates, the Bank of England is “pushing on a string” (as Keynes put it) if people do not want to borrow money because their expectations for the future are so dire? Keynes also said that governments should run surpluses when times are good to act as a stabiliser. If we had actually done that in the UK, how much better equipped would we be now to face the downturn?

    What, precisely, in your wisdom, would you do instead? Go for the laissez-faire favourite, the balanced budget approach that exacerbates the economic cycle? The one sure thing is that there will always be economic cycles and the government is a major economic player. Standing aside and leaving unemployment to rocket is simply not an option (unless you are a Cameronite).

    Careful and timely investment in necessary infrastructure projects that aid the future productivity of the economy is absolutely the thing to do now. That is what Keynes would have recommended and that is what is right for Britain now, 70 years on.

  • This article came out of some musings and was meant more as a challenge and a point of debate, which it appears to have acheived. My overall concern is that in the panic and melee of the recession, that the argument for the heavy handed ‘financial stimulus’ approaches has not been made sufficiently strongly. For the record, I never meant to imply that Keynes was a socialist.

    For me, the problems of the twentieth century were common to the economic theories people have referred to which I will (for convenience) I will refer to as Socialism, Keynsianism and Laissez-Faire. They are all far too centralist. Yes, even laissez-faire has allowed the domination of huge organisations – be they banks, supermarkets or manufaturers.

    I think we need diversity and localism in the economy. The analogy is that of subsistence farmers who plant several different crops to minimise the risk from one of them failing. We should look at banks and other companies in the same light. Imagine a few hundred banks each deploying a few different investment strategies. If one of these strategies fails, there is not likely to be much overall hit to all the other banks.

    Sadly what we’ve had in the last few years our economy has ended up being more like a handful banks deploying almost identical strategies. We need to find new ways to manipulate the markets to stop these things happening again.

  • Dave Brockman 3rd Feb '09 - 9:13pm

    Very interesting article – I was just looking for the quote by Keynes (“avarice and usury must be our gods a little longer yet to lead us out of the tunnel of economic necessity into daylight” IIRC) and this was the only hit!

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