Return of the Keynesians?

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Since the end of the Second World War British economic policy has largely been an ideological battle between two schools of thought. One embraces the state interventionist ideas of John Maynard Keynes. The other the ideas of free market thinkers such as Friedrich Hayek and Milton Friedman.

But as the financial pressures of the coronavirus hit, and as countries around the world are faced with rising unemployment, a reduction in economic output and the failure of major industries the phrase “We’re all Keynesians now” has never been more apt in our modern history.

The economic and political fallout from the COVID crisis will be huge and bring new challenges to Governments and political leaders around the world. The UK government has already provided a £30 billion stimulus package to help mitigate the financial fallout, followed by a further £330 billion in guaranteed loans to businesses.

With that in mind it the support measures announced so far are time limited. Support for the self-employed and causal workers is focused on mitigating the effects of not being able to work during lockdown. There have been no moves towards permanently readdressing the low pay or inequalities these people routinely face in their day to day lives.

Such short-term changes will be easier to revoke once the crisis is seen to be resolved. It’s also very noticeable that there has been no discussion of pay increases for NHS staff and that in all likelihood a public sector pay freeze will be instituted by the Chancellor in a bid to drawback the costs of the Government response.

Once the pandemic is resolved, two possible scenarios could play out. The government could accept that the COVID crisis has ushered in a new economic reality – one that sees greater state intervention in the economy. Or a reversion to the orthodoxy of austerity which dominated the period of the last decade.

One thing is for certain, the adoption of either policy has the potential to upset the coalition of voters assembled by the Conservative party during the 2019 election. The  adoption of a high spending, big state, interventionist strategy will please the newly acquired voters in the traditionally working class Labour heartlands but could run aground on the Government back benches. Many who see themselves as free marketeers and the upholders of the Thatcherite legacy.

The phrase “We’re all Keynesians now” should have added significant to the Liberal Democrats as the natural heirs to the Liberal Party. Keynes was a lifelong member of the Liberals and he took a major role in defining its economic policy in the interwar period.

Both Layla Moran and Ed Davey have voiced their support for economic intervention during the crisis. They have been at the forefront of challenging the Government to save workers who have fallen through the net and to continue economic support to certain sectors after the lockdown has been fully lifted.

Once the COVID crisis subsides, political considerations will again come to the forefront and the start of a much awaited Leadership contest. As in the aftermath of the 2008 crisis the dominating discussions will be the economy and how to address both the economic and social fallout we will face as a nation.

The policies that the party adopts will be crucial not only to any future electoral success but also in carving out the ground we are to occupy in the post Brexit COVID world. Whether we embrace a continuation of large state intervention or to promote classical Liberal economics will be down to our membership in the formation of policy.

The question that all Liberal Democrat members must now ask themselves is “Are we all Keynesians now?” and whether our next leader will take up the position of a Keynesian economic response in an uncertain future.

* Ben Nutland is a Lib Dem councillor on South Gloucestershire Council

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  • Peter Martin 14th May '20 - 2:16pm

    “One embraces the state interventionist ideas of John Maynard Keynes. The other the ideas of free market thinkers such as Friedrich Hayek and Milton Friedman.”

    This is not correct. The economy works in the same way regardless of the political ideology of those in control of it. Also it’s not correct to suggest that the ideas of modern economics are limited by the contributions of these three.

    Economics like any other discipline does move on. Modern post Keynesian thought has been influenced by the works of Keynes but it isn’t entirely dependent on them. Keynes lived in age when Gold was still an important part of the monetary system. Since the early 70’s that link has been entirely severed. Many economists, who should really know better, carry on as if the link was still there.

    Any modern economist, with a good level of macroeconomic knowledge, could advise both a left and a right inclined government. Say a right wing government wanted to shrink the size of the state. It’s not really a problem. I won’t go into how to do it except to say that the imposition of austerity economics isn’t the way! Conversely, increasing the size of the state sector, for a left inclined govt, does not require lots of extra government spending.

    Beware of the term neo-Keynesianism. That should read not-Keynesianism and is just monetarism by another name.

  • The word NEO. replace it with NOT. It is a wolf in sheep’s clothing word. Can be seen as right wing or monetarists creeping in to ‘take over’ Example neo-liberalism should be replaced by NOT liberalism.

  • Laurence Cox 14th May '20 - 3:11pm

    We need some Keynesian policies now to save Transport for London:

    [I’ve no doubt that this also applies for transport services in other parts of the country as well, but this is the area I live in and know].

    Even though there are people on the buses, they are not paying fares because the payment machines on almost all buses are next to the driver and buses now are entry and exit by the middle doors only. What would make sense would be to allow the Mayor to levy an additional precept on Council Tax to fund all bus journeys, but I suspect that would need primary legislation.

  • Daniel Duggan 14th May '20 - 3:55pm

    ”Once the pandemic is resolved, two possible scenarios could play out. The government could accept that the COVID crisis has ushered in a new economic reality – one that sees greater state intervention in the economy. Or a reversion to the orthodoxy of austerity which dominated the period of the last decade”.

    As liberals we must avoid getting drawn into either of these directions, and offer an alternative to the big government social democracy of the Butskellism period and the neo-liberalism of the last forty years. Let’s stress individualism, mutual aid and voluntaryism.

  • The Economist has a book review this week of ‘The Price of Peace; by Zachary Carter a newly published biography of Keynes
    The author writes “Keynes perceived ‘the real struggle’ between Liberalism, in which the primary objectives of government were peace, freedom of trade and economic wealth and a militarist school “which thinks in terms of power, prestige, national or personal glory, the imposition of a culture and hereditary or racial prejudice,
    His advice was, for the most part, ignored during his lifetime only really coming to prominence after the war when Keynesianism was defined by his colleagues, such as Joan Robinson and John Hicks, and intellectuals like J. K. Galbraith. Contrarily, Friedman, Hayek and others argued that Keynesianism had resulted in government playing too big a role in the economy and a chronic tendency towards inflation leading ultimately to the stagflation of the 1970s.
    Perhaps one of Keynes lasting insights will be his quip about defunct economists. “Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back”

  • Peter Martin 15th May '20 - 11:03am

    “Friedman, Hayek and others argued that Keynesianism had resulted in government playing too big a role in the economy and a chronic tendency towards inflation leading ultimately to the stagflation of the 1970s.”

    As Mandy Rice-Davies famously remarked ” Well, they would, wouldn’t they?”

    It’s all to do with politics and nothing to do with economics.

    It’s hard to imagine now, but the idea in the 50’s and 60’s was that unemployment could be kept below 2% at the same time as inflation was kept under control. There was insufficient attention give to regional and national variations, so the economy in the SE of England was always overheating at the same time as unemployment in Northern Ireland was still a major problem. So we had an outbreak of violence in Northern Ireland and the outbreak of class conflict in the more prosperous parts of the UK wrestled with the effects of increased levels of inflation.

    It could all have been so easily avoided if Keynesian policies had been applied more intelligently. Keynes can’t be held responsible politicians cocking it up!

  • Keynes has an unfortunate legacy. People seem to always want to attach his name to horrible events.

    Forcing people to not work and holding them under a form of house arrest, then paying them a reduced salary in compensation is not a “Keynesian policy” it may be the required policy from a public health perspective (time will tell), but it is not an economic policy.

    At least it isn’t as bad as those who seem to advocate going to war is a type of Keynesianism.

    Perhaps advocate for policies on the basis of how they work when we are not implementing authoritarian, dystopian social restrictions. It will make for stronger arguments.

  • Peter Martin 15th May '20 - 3:30pm

    @ JoeB,

    I notice you are quite fond of quoting Keynes. It’s always selectively and to match your POV like when he’s written something about inflation robbing the savings of elderly widows or that deficits in the bad times need to be matched by surpluses in good time.

    He might have had important insights but he didn’t always get it right. For example he
    was an active proponent of eugenics and served as Director of the British Eugenics Society from 1937 to 1944.

    So he’s not infallible. That doesn’t mean we reject everything but we do need to build on what he did and modify it as necessary.

  • Peter Martin,

    Keynes’s theories are the foundation of what has come to be termed macroeconomics. No one is infallible and Keynesian economists such as Martin Wolf, Paul Krugman, Oliver Blanchard, Jonathan Portes, Simon-Wren Lewis, Thomas Palley, Marc Lavoie etc have indeed built on and modified the general theory to develop a mainstream economics adapted to the 21st century.

  • Peter Martin 15th May '20 - 5:38pm

    @ Joe B,

    Building and modifying is one thing, completely changing them is another.

    Where does Keynes say that the level of interest rates needs to be continually adjusted to regulate the economy? This is so called neo-Keynesianism, really not-Keynesianism, which is the basis of 21st century mainstream economics. It’s just monetarism dressed up to appear progressive.

  • Peter Martin 15th May '20 - 6:16pm

    Correction: I should have said that so called New Keynesianism is the basis of 21st century economics and is really not Keynesian at all. Sorry to be pedantic!

  • Peter Martin 16th May '20 - 10:27am

    @ Joe B,

    The problem, as always in economics, is that there’s hardly ever any agreement. In nearly all other academic disciplines, there can of course be disagreements but underneath all that there is a strong desire to approach consensus. Everyone can have their own opinion on why this is. I’d say it is caused by fundamental political differences.

    So what does “the return of the Keynesians” mean? Is it the return of the original Keynesians, the Post Keyenesians, the neo Keynesians or the New Keynesians? I could probably find a couple of others if I looked hard enough and there will be splits within these general headings. I’m sure they all hate each other with a passion too!

    As always everyone will have their opinions on which they prefer. But I’d say it would be generally accepted that the so-called New Keynesians are furthest away from the original Keynesians.

    “Keynes’s theories are the foundation of what has come to be termed macroeconomics…….mainstream economics adapted to the 21st century”

    Hardly anyone, but as always in economics its quite possible to find someone, considers that the mainstream economics of the 21st century has much to do with Keynes. That’s why we have these kind of articles on the return of his credibility.

  • The foregoing is important and interesting. And doubtless enjoyable for the participants, though I am not suggesting that the writers are in it for the joy of debate, heedless of current need — and current opportunity, for party and the nation. The knowledge displayed above will be useful in due time, but I wish to suggest what I think is an elementary notion, operating in the reverse direction. Its essence lies in a good old word, applied with a small C by Prof Guy Standing of the Progressive Economic Forum: “Commonwealth”.

    Forget the Empire; think of Cromwell and Crown, and ask which was right, morally and intellectually. We need to rename our state, and change our perspective. We need to apply our Economic deliberations from a different standpoint: the National Income, not the National Product. Broadly — very broadly, I confess — the National Product is the bosses’, the proprietors’ view of the world: the Households’ world is the National Income, which is the aggregate of household incomes. And surely it is with people’s lives that our party truly concerns itself? Much of our deliberations revolves around the ills of today’s society, and focuses on the current gross inequity in the way disposable incomes are distributed, and what the LDs should or can do about it.

    [continues below]

  • [continues from above]

    I suggest this: the prime purpose of the Chancellor’s annual Budget ought to be the declaration in his Budget of the new year’s National Income Dividend. That will be a percentage — the chancellor’s decision — of the previous year’s aggregated household incomes, to be paid to every resident adult.

    Attentive readers will accuse me of trying to slide in UBI under disguise. Guilty. Perhaps insane: LDs must decide. My pleas would be that the very name (the NEW name) declares a different approach, and therefore vocabulary and image.

    In the new UK-Commonwealth the concern and purpose of Government shall not be the size of the GDP but the justice, harmony, and wellbeing of the people. So the wealth of the national community shall be distributed : divided first so that no-one is destitute, but gets a basic income; and that achieved, rewards of what’s left over shall be distributed according to desert. In a true democracy — one with PR — the People will, in effect, have chosen what this NID or UBI shall be each year or Parliamentary General Election. And financing it is ‘no problem’. There will BE problems, of course: reshaped Incomes = reshaped Demand= reshaped Employment.

    I would go on, but you know our Editors! I HOPE there will be readers who will now expose the folly and impossibility of the approach sketched in above: I shall be delighted to gracefully concede, and retire silently to ‘cultiver mon jardin’, and get back on good terms with my wife!

  • John Littler 19th May '20 - 6:33pm

    “Forcing people into lockdown and paying them is not a Keynsian policy” The force was never advocated by Keynes but if there is no money going into people’s pockets, the economy will start to go into a dangerous downward spiral from which it is a long and difficult process to get out of. This would be especially difficult when the rest of the world is unable to offer prosperous markets for us to sell to.

    The money paid to people is not dangerous Socialism but a pragmatic response that even few Tories have complained much about.

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