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.





Why has there been no social response to the recession?

15 09 2009

images[2]When Lehman brothers collapsed a year ago, a credit crunch turned into a full blown panic. The result has been recession and a collapse in world trade. But there the similarities (with the thirties) end. Growth is returning. Stock markets are booming. Democratic government survives.

Today’s Times editorial sums up the mood of many in the elite after a turbulent year. It has been tough but capitalism survives more or less intact. Perhaps the most striking aspect of this recession has been the lack of any serious questioning of the market system, despite the negative impact of unemployment and the collapse of world trade on millions across the world.

In the past, recessions have been met with widespread social disorder, even in developed countries. In the thirties of course the recession played a big role in the rise to power of Hitler and the Nazis. But even as recently as the  early eighties there were  large scale strikes and riots  in the UK which had an economic background to them. Why is it that this recession has been met with quiescence across the world?

During the summer I read Tristram Hunt’s biography of Engels. The most poignant section dealt with the forty years or so that passed after the 1848 revolutions in Europe which helped to inspire Marx and Engels to develop their critique of capitalism. For most of this time the two revolutionaries, Marx in London and Engels running the family firm in Manchester, wrote letters to each other pointing out what they hoped were signs if incipient insurrection around the world. A strike here, an outbreak of political radicalism there, all enough to raise hopes that something big was about to happen. In fact they were living through a period of relative social peace as capitalism began to expand around the world. How many times must each of them pondered on Marx’s profound words from 1852

Men make their own history, but they do not make it as they please; they do not make it under self-selected circumstances, but under circumstances existing already, given and transmitted from the past.

We appear to be living through a period of history in which the question of profound social change is no longer on the agenda. Does this matter? Most people in the world are much better off than ever before. Even in India, China and other traditionally poor countries living standards are rising, although from a very low base.

Yet there is a profound sense of unease running throughout western society. It is not the spectre of communism which is haunting Europe, but the actuality of capitalism. Many people now feel uncomfortable with the benefits which it has brought with it. The French government is leading the way in trying to replace the traditional yardstick of progress, economic expansion or GDP, with a ‘happiness’ index. This is part of a broader backlash against materialism and economic progress exemplified by the influential Green movement. Even in a recession, when many people in the west have experienced directly the misery that comes from lack of jobs and money, these voices have not been stilled.

It would be a terrible thing if mankind turned its back on material progress while so much remains to be achieved in raising living standards around the world to a tolerable level. Marx and Engels objected to capitalism because they did not believe that it could raise the living standards of all in a consistent way andf that it was prone to violent crises. We have seen their critique vindicated once again in the current recession. The truly radical approach today is to insist on the necessity for continued economic growth, and to deal with any obstacles to that. At some point this may mean that people begin to question the ability of the market to deliver that growth and a search for alternatives can begin again. But at present the most important thing to do is to challenge the anti-growth sentiments which are occupying the hearts and minds of many.

It was only at the end of Engels life on the last decades of the 19th century that the new socialist movement began to make itself felt in the world. History does not run in straight lines and is not predictable. Neither does it repeat itself and we should not be deluded into thinking that the mass socialist movements of the past will reappear. But neither should we think for one minute that human social history is over. As long as we want things to change then we can make them do so-but not necessarily in circumstances of our own choosing.





Democratic reform and the Titanic

1 06 2009
Asset bubbles + zombie political parties = ?

Asset bubbles + zombie political parties = ?

The news that the last survivor of the Titanic, Lillian Gertrud Asplund, has died reminds us that rearranging the deckchairs on that doomed vessel has since been a metaphor for wasting time on trivial things while disaster looms. The current discussion on democratic reform falls into that category. Whatever may or may not be the merits of proportional representation, the discussion about them at this point is almost entirely irrelevant to the real problems we face. The debacle over MPs’ expenses is partly the product of underlying anger about the recession, partly a response to politicians lecturing us about personal morality for years, and partly their own fault for making greed the official cause of the recession itself. These are all symptoms of a political crisis and not causes.

These contingent factors have precipitated a crisis in public confidence in the parties. But the bankruptcy of our political culture is the culmination of a long process of deterioration in politics, not the cause of it. The political parties have had their political blood drained away over the years: zombie parties propped up by bubbles in the economy

The problem of the emptiness of politics is not going to disappear simply because we vote for MPs in a different way. Neither is it right to see this crisis simply as a distraction from dealing with the economy, as the head of the CBI reminds us today. It is the crisis of politics that has led us into this recession and that has also caused the weak and vacillating response to it. The recession has exposed the problems for all to see and it is this public exposure that is now bringing down the political parties.

The second part of Sean Collins’ excellent essay on the difference between the 1930s Depression and today ends by making the point that the US President FD Roosevelt, whatever his failings, at least tried to attack the cause of the Depression in a bold and experimental way. This kind of openness to experimentation does not mean making Esther Rantzen an MP, it means throwing off many of the conservative ways of thinking and operating that have become part of our way of life.

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Every recession is different

29 04 2009

This is the message of Sean Collins’ excellent new essay, The ‘credit crunch’: another Great Depression?  where he looks at the difference between the slump in the 1930s and the recession today. As he quite rightly points out, every recession is different and therefore demands a different approach in terms of a resolution. Collins lists the following aspects of this recession which mark it out from the 30s: 

1) As the post-war boom ended, the major economies encountered significant problems of stagnant profitability in productive industries. These problems were not fundamentally addressed by the recessions of the 1970s, 1980s or the early 1990s, and remain to this day. Extreme examples of the holdover of unprofitable businesses are the American car manufacturers GM and Chrysler.

2) As the economy grows, so too will the credit and the financial sphere. However, a trend in the major economies is for this sphere to grow at a faster pace than the real economy. Especially noticeable since the 1987 stock market crash was the trend for stagnancy in production leading to surplus capital, which found outlets in an even more extensive expansion of credit and a greater development of (and reliance on) finance as an income-generating area. This development explains the stock market and housing bubbles, as well as the proliferation of financial instruments.

3) A turning point was the end of the Cold War in the late 1980s, which, among other things, lessened international tensions and weakened labour movements. In the global arena, we see greater export of capital and goods from the developed countries, and the expansion of production in emerging markets. A significant development is the opening up of new points of production in China and other parts of Asia.

4) The easing of tensions following the end of the Cold War also gave the market system much more room to manoeuvre, without the need for destructive, cleansing recessions. This allowed capitalism to survive without traditional boom-bust cycles, otherwise known as the ‘Great Moderation’ and ‘SAD’ (stable, anaemic, durable) period. Many have welcomed that recessions became milder and less frequent, but the downside was that growth was muted. Another self-imposed constraint in this period are ‘green’ measures that restrict expansion. 

5) The wide expansion of credit, including debt-fuelled consumption, was not sustainable. No one could anticipate when the limit of the credit system would be reached. But now we know: it was precipitated by the US sub-prime crisis, with domino effects across finance and into other sectors.

6) The problems in the productive sphere in the major economies continue today (and arguably more in the US and UK than in Germany and Japan). The ‘deleveraging’ effect from the credit crisis has not fully played out, and is likely to be destructive. In particular, the fallout from this severe asset-based recession will now curb both key drivers of previous 10 to 15 years of economic activity: bank lending/financial activity and consumer spending, leaving a question mark over future sources of growth.

Read this alongside Gavin Poynter’s analysis of the UK economy and you get a very compelling case for the specificities of the problems we face.

At The Battle for the Economy conference in London on May 16 (2009) we will be attempting to tackle some of the issues raised by Sean and Gavin. Lazy comparisons with the past are out, as are false hopes that the underlying problems will just go away.  Our politicians are ducking many of the central issues and at best they are offering us a future of austerity – it will be a great discussion so buy your tickets now.