The irony is that today this caricature has become the accepted view of Keynes even among the mainstream left.
Let us remind ourselves what Keynes really said. He was concerned that the capitalist system was given to waves of rising and falling demand and that people suffered as a result. He therefore proposed that government should affect its fiscal policy to smooth these waves out.
At a time of falling demand in the economy, Keynes argued, government should increase spending and cut taxes and borrow to enable to do this.
When demand was rising, however, it should increase taxes or cut spending to cool the economy down, and pay off its debt.
But today Keynesian economics are more likely to be seen as the belief that the government should always run a large deficit.
Take David Marquand (I have generally forgotten which party he is in these days), as quoted by Timothy Garton Ash in today's Guardian:
David Marquand, a veteran observer of British politics, draws the stark conclusion that this budget, dictated by fear of global bond markets, is incompatible with liberal politics, which – "at least as they have been practised in this country for more than a century" – seek to tame capitalism in the interest of social justice."Incompatible with liberal politics"? This is nonsense. The budget was merely a recognition of the fact that if you borrow billions of pounds you have to pay it back some time.
Marquand sounds like a slacker who goes thousands overdrawn and then complains about "The Man" when he gets a letter from his bank. The truth is that if you are billions in debt, it is bound to affect your room for manoeuvre,
The deeper question is whether, as I asked last year, Keynesian demand management is politically possible. When the economy is doing well we demand more government spending: when it is doing badly we are up for spending cuts and austerity.
Keynesian economics may well be right but they have to be properly understood and they may well be politically impossible to implement.
interesting thoughts yet i believe Labour spent for spendings sake, untargeted increasing NHS management an example. They did not have an eye on how their spending might develop economic growth.
ReplyDeleteWhereas Keynes advocated spending to lay the foundations for growth, (build housing or roads, invest in green energy etc). So when growth comes the country has more comparative advantages to sustain the recovery.
This country suffers from little interest from govt and business long term investment, be it in R&D in industry or in long term capital investment from government. It is why we continue to tumble down wealth and living standard league tables.
There is a very simple reason why we are condemned to more or less permanent deficits. This has nothing much to do with Keynes. It derives, strange as this may sound, from the generally accepted view that inflation of about 2% is optimum. I’ll explain.
ReplyDeleteGiven this 2% inflation, the national debt and the monetary base will decline in real terms at 2% pa. Thus one needs a deficit of 2% multiplied by (national debt + monetary base) just to keep the two latter constant in real terms. Moreover, if the economy is growing at say 2% in real terms, one needs yet further deficit to keep the national debt and monetary base constant as a proportion of GDP (and it is reasonable to assume that they will remain roughly at the constant proportion).
For more on this see under heading “Central banks under functional finance” here:
http://mpra.ub.uni-muenchen.de/23785/