After the recession-the return of Keynes or the end of economics?

21 10 2009

images[1]Robert Lucas, the University of Chicago economist, joked last year that “everyone is a Keynesian in a foxhole’. At first glance it certainly seems that the idea of government intervention to maintain economies in trouble has made a comeback. In the past year various governments have nationalised banks, introduced major stimulus programmes, prevented industries from collapsing, subsidised employment and printed money in order to combat the financial crisis.

Yet as Sean Collins has argued in his excellent review of Keynes: The Return Of The Master by Robert Skidelsky, whom I shall be debating next week at  this event  , the ragbag of anti-crisis measures put together around the world was not the product of any widespread conversion to Keynesianism. It was instead an ad hoc programme of state measures aimed at one thing-staving off financial collapse and its perceived consequences.

The Keynes they like is not the proponent of permanent state intervention to guarantee full employment. He is instead the man who said ‘in the long run we are all dead’. In so far as Keynesianism means anything today it represents the short term managerial approach to running economies which characterises the UK and other developed countries. Why has there been so much state intervention from governments which have been arguing for ‘light touch’ regulation for the past ten years? Because there is no alternative on the horizon.

The recession has effectively destroyed, at least for the time being, the belief in free markets that has governed most of the developed world since the discrediting of Keynes in the 1970s. As Sean Collins argues however, we should not go along with the thesis that the past thirty years have been about actual free markets. During this period the state has continued to intervene in the economy, although in different ways.

Nevertheless we have reached a point where economics itself has been discredited. As Daniel Yergin argues there are so many explanations for the recession that no coherent narrative has emerged. This vacuum is being filled by another legacy from Keynes. His belief in both the power of psychology and the essential uncertainty of the capitalism economy have become more influential in response to the recession. Both of these points are highlighted by Skidelsky in his book.

The falling back on psychological explanations for the crisis amongst behavioural economists is a rejection of real economics. The crisis has in roots in economic stagnation in the west, the consequent financialisation of western economies and global imbalances created by the relative dynamism of the BRICs. To ignore these causes and point to crowd psychology reduces the problem to one susceptible by state manipulation of people’s activity. In this sense it fits with the short termism we spoke of above. It represents an inability to face reality and think through what it would mean to create more dynamic western economies.

The elevation of uncertainty as a major problem is also wrong. Keynes, writing in the 1930s was obsessed with the threat of capitalist collapse. Faced with the Depression and looming global conflict this was not an unreasonable fear. It is to Keynes’ credit, in contrast with many who followed after him, that he understood that economics is about politics. His argument for full employment was that it was necessary to stave off revolution.

In fact one thing the recession has shown us is that capitalism is in general very stable and quite predictable. We are in the midst of a major recession but as I have noted before there has been very little social response. This is because capitalism is at root a system of social relations. No matter how bad the economy may get, as long as there is no organised alternative it will bounce back.

Emphasising the uncertainty and risks involved in capitalism today can only have one effect, one which Skidelsky himself recognises,’uncertainty imposes a kind of permanent fearfulness about the future which puts a damper on economic progress’. Skidelsky also criticises some of the behaviouralist economists, like Shiller, for ‘panic’ in the face of apparently irrational human behaviour in the run up to the recession.

There may be opportunities, due to the crisis within economics, to debate what kind of economy we need. This would entail rejecting the panic and uncertainty brigade and arguing for a longer term more strategic approach to the economy, more planning, more debate about where we want to go and above all more leadership.

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3 responses

23 10 2009
Johny Morris

You’re right about a disconnected neo-Keynesianism. I raised my eyebrows recently with the remarks of the Governor of the Bank of England. One moment he’s playing ball with the would be manager s of the markets with remarks exposing forward economic policy designed to keep a low exchange rate. The next he’s so far off side he could be playing goalie for the opposition slating those in power for not reforming the banking markets.
(Of course these latter remarks are not entirely disinterested – in the 3 ring circus that constitutes banking control between the BoE, the FSA and HM Gov he may be making a bit of a powerplay).

So exchange controls and pay freezes anyone?

Of course the problem with using these kinds of levers are the perverse incentives they create. A banker of my acquaintance (far down the food chain from the heady heights of the city) has been told what his bonus cap is. Of course he’s achieved his pro-rata target already and now faces the moral dilemma of simmering new deals into the New Year or doing them now for less reward. Oh yeh and he works in the small/medium sized enterprise medium-term finance market. Just the kind of establishments where entrepreneurialism goes to die for lack of liquidity.

More Wilsonian economics anyone?

And to complete that blast from the past feeling, I’ve just been watching the chubby BNP chap on question time. Takes me right back to my youth in Wythenshawe when Enoch Powel was around. Not that any of my cohort understood the classical references of the rivers of blood speech. We all knew the racist chants though. Nothing like the threat of fascism to curb any radical inclinations on the part of the political class. I don’t expect anything more from them than platitudes and finger wagging s as they huddle in a spurious unity against this phantom threat.

28 10 2009
The market is not capable of being rational,but people are « UK After The Recession

[…] own conviction that traditional economics is ‘a dogma whose time has passed’. As I have argued before there is little doubt that rational or free market theories have been discredited by the reality of […]

26 04 2010
Oh no, not Keynes again! New economic thinking urgently required « UK After The Recession

[…] aware of its intellectual underpinning, the event took place at Kings College, Cambridge, where Keynes developed his General Theory, sessions took place in the Keynes lecture theatre and many of the […]

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