Singing Keynes' praises

Philip Booth reviews "Masters of Money".

Last night's BBC documentary Keynes in the Masters of Money series will be followed by two others on Hayek and Marx. The first programme was brilliantly presented by Stephanie Flanders, though perhaps it was too strong in its praise of its subject. The uncritical nature of the programme is not necessarily inappropriate as Stephanie Flanders made clear that she was presenting Keynes as a hugely important figure in post-1930s Britain, rather than as being correct on all matters of economics. Perhaps, by way of balance, Hayek will get the same enthusiastic treatment next Monday.

As a person, Keynes was portrayed by his supporters as a "we are all in this together" sort of a chap. Some might find this difficult to square with his support for eugenics. There is a temptation amongst those of a left-leaning persuasion to assume that those who want to use deliberate government intervention to avoid misery are necessarily more concerned for the plight of all the people than those of us who believe in freedom - this is by no means the case.

Similarly, there was much discussion of his supposed internationalism and his efforts to ensure that we had a world monetary order that enabled the weak to prosper alongside the strong. However, in 1933 Keynes said: "I sympathise, therefore, with those who would minimise, rather than with those who would maximise, economic entanglement between nations.[L]et goods be homespun whenever it is reasonably and conveniently possible. I am inclined to the belief that, after the transition is accomplished, a greater measure of national self-sufficiency and economic isolation between countries than existed in 1914 may tend to serve the cause of peace." This was not an isolated statement on such matters.

The issue of whether Keynes was right or wrong on the issues we today call "Keynesian" was skirted round. Apart from my own brief appearances, and criticisms from Kenneth Rogoff and some pertinent comments from David Laws, commentators had few reservations.

Let's take first the issue of the Great Depression. Britain was out of depression long before General Theory was published. Indeed, by 1936, output had almost would soon recover to the point which it would have reached had we seen trend growth from 1929. Britain did so with very tight fiscal policy. Monetary policy was very loose, of course, after coming off gold. But, this is precisely the policy that Keynes said would not work. It was used. It worked.

The US, on the other hand, had her Hoover dams and other major Keynesian projects. They were described in the programme as having created thousands of jobs. Perhaps they did. The point about Keynesian economics is that it is not very good at probing into both the "seen" and the "unseen". Economists should not generalise from the particular. Certainly, in terms of its effects on the economy as a whole, US policy in the Great Depression was an abject failure. Indeed, as Stephanie Flanders said, the US was not out of depression at the outbreak of war. In other words, there were 17 years between 1929 and sustained peacetime growth. Why was this? Perhaps it was something to do with the fact that, even if stimulus policies work in theory (doubtful in itself), they do not work in practice once put in the hands of politicians. Maybe the policy uncertainty created by giving government greater powers keeps those animal spirits low.

Arguably the worst prediction of the night came from Joseph Stiglitz. He said - presumably in March when other interviews were filmed - that we know what will almost certainly happen if the government does not borrow more money: "unemployment will go up." Unemployment has fallen every month since. We have a growth problem but, surely, if Keynes' economics of recession is about anything, it is about rigidities in labour markets rather than the enhancement of productivity necessary for growth. But, prediction is not Stiglitz's strong point. In a co-authored paper with one of President Obama's later Chief Economic Advisors, he said when commenting on the introduction of a new capital standard in 2002: "on the basis of historical experience, the risk to the government from a potential default on GSE [Fannie Mae and Freddia Mac] debt is effectively zero."

Would Keynes be on Stiglitz's side today? Who knows? And this was one issue on which Stephanie Flanders was deliberately equivocal. It is widely thought that Hayek did not review General Theory because he believed that Keynes would change his mind about the issues - as he did with Treatise on Money. Certainly, there is no reason to think that he would have proposed what came to be called Keynesian policies in countries already borrowing eight per cent of national income, where the government is spending 50 per cent of national income, where unemployment is falling and where real wages seem to be adjusting.

The role of money in creating the Great Depression was not mentioned in the programme - despite the widespread consensus on this issue. The cause was animal spirits, pure and simple. The same cause was cited for the crash of 2008. Indeed, it was even argued that before the crash politicians had been preaching (and it was implied practising) uncritically the doctrine of free markets only to be derailed by animal spirits. No mention of monetary policy and the "Greenspan put". No mention of too big to fail. No mention of Fannie and Freddie or Basel II. No mention of US bankruptcy law. No mention of the policy of encouraging home ownership amongst those who could not afford it. No mention of US deposit insurance which never had the risk-based premiums that were supposed to be levied. No mention of government spending accelerating in countries such as the UK, US, Portugal, Spain and so on. Hopefully, these causes will be presented in next week's programme. A government that follows the above policies and spends nearly twice as much as a proportion of national income as even Keynes thought desirable is not practising a free-market policy.

In a long feature on the euro crisis, it was suggested by the greatest weight of voices that Keynes would today have been warning against strong countries imposing austerity on the weak through government spending cuts and thus causing the violent protests. In fact, although he may well have recommended debt forgiveness, it is certainly not clear what Keynes might have thought on the issue of reducing government spending in countries where it has reached unsustainable levels.

We were also told that our international economic relationships would have been transformed if we had followed his advice and had a fixed exchange rate system where both surplus and deficit countries made adjustments. This may or may not be true, but surely Keynes would have pointed his finger at the deficit countries when Bretton Woods collapsed in the early 1970s, the seeds of which were sown a few years earlier. The problem then was not German deflation (inflation was low but positive) but US and UK inflation (the former caused by government spending on welfare and the Vietnam War, the latter by general indiscipline).

Indeed, famously, when the facts changed, Keynes changed his mind. Perhaps he would have learned to like floating exchange rates, which lead to the beggar-my-neighbour policies the programme criticised becoming an irrelevance. Perhaps Keynes would have seen floating exchange rates and the free movement of capital as the best way to facilitate economic adjustments between very different countries suffering from asymmetric shocks (though not to provide an excuse for endemic inflation).

Stephanie Flanders ended with a paradox. This man who believed in animal spirits and the unpredictability of human nature also believed in governments steering the economy. Next week, perhaps, we will hear that this is not just a paradox, but a contradiction. Perhaps we will hear too that, when people take responsibility for their own financial recklessness and respond to the diverse signals that they see in market prices, the economy can self-correct much more effectively than it can ever be steered by intelligent people in Whitehall - and recessions will be that much shorter.

Philip Booth is Editorial and Programme Director at the Institute of Economic Affairs

Keynes. Photograph: Getty Images

Philip Booth is Editorial and Programme Director at the Institute of Economic Affairs.

 

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The government has admitted it can curb drugs without criminalising users

Under the Psychoactive Substances Act it will not be a criminal offence for someone to possess for their own consumption recreational drugs too dangerous to be legally sold to the public.

From Thursday, it may be illegal for churches to use incense. They should be safe from prosecution though, because, as the policing minister was forced to clarify, the mind-altering effects of holy smells aren’t the intended target of the Psychoactive Substances Act, which comes into force this week.

Incense-wafters aren’t the only ones wondering whether they will be criminalised by the Act. Its loose definition of psychoactive substances has been ridiculed for apparently banning, among other things, flowers, perfume and vaping.

Anyone writing about drugs can save time by creating a shortcut to insert the words “the government has ignored its advisors” and this Act was no exception. The advisory council repeatedly warned the government that its definition would both ban things that it didn’t mean to prohibit and could, at the same time, be unenforcable. You can guess how much difference these interventions made.

But, bad though the definition is – not a small problem when the entire law rests on it – the Act is actually much better than is usually admitted.

Under the law, it will not be a criminal offence for someone to possess, for their own consumption, recreational drugs that are considered too dangerous to be legally sold to the public.

That sounds like a mess, and it is. But it’s a mess that many reformers have long advocated for other drugs. Portugal decriminalised drug possession in 2001 while keeping supply illegal, and its approach is well-regarded by reformers, including the Liberal Democrats, who pledged to adopt this model in their last manifesto.

This fudge is the best option out of what was politically possible for dealing with what, until this week, were called legal highs.

Before the Act, high-street shops were free to display new drugs in their windows. With 335 head shops in the UK, the drugs were visible in everyday places – giving the impression that they couldn’t be that dangerous. As far as the data can be trusted, it’s likely that dozens of people are now dying each year after taking the drugs.

Since legal highs were being openly sold and people were thought to be dying from them, it was obvious that the government would have to act. Until it did, every death would be blamed on its inaction, even if the death rate for users of some newly banned drugs may be lower than it is for those who take part in still-legal activities like football. The only question was what the government would do.

The most exciting option would have been for it to incentivise manufacturers to come up with mind-altering drugs that are safe to take. New Zealand is allowing drug makers to run trials of psychoactive drugs, which could eventually – if proved safe enough – be sold legally. One day, this might change the world of drug-taking, but this kind of excitement was never going to appeal to Theresa May’s Home Office.

What was far more plausible was that the government would decide to treat new drugs like old ones. Just as anyone caught with cocaine or ecstasy faces a criminal record, so users of new drugs could have been hit with the same. This was how legal highs have been treated up until now when one was considered serious enough to require a ban.

But instead, the government has recognised that its aim – getting new drugs out of high-street shop windows so they don’t seem so normal – didn’t depend on criminalising users. A similar law in Ireland achieved precisely this. To its credit, the government realised it would be disproportionate to make it a criminal offence to possess the now-illegal highs.

The reality of the law will look chaotic. Users will still be able to buy new drugs online – which could open them to prosecution for import – and the law will do nothing to make drugs any safer. Some users might now be exposed to dealers who also want to sell them more dangerous other drugs. There will be few prosecutions and some head shop owners might try to pick holes in the law: the government seems to have recognised that it needed a better definition to have any chance of making the law stick.

But, most importantly for those of us who think the UK’s drug laws should be better at reducing the damage drugs cause, the government, for the first time, has decided that a class of recreational drugs are too dangerous to be sold but that it shouldn’t be a crime to possess them. The pressure on the government to act on legal highs has been relieved, without ordinary users being criminalised. For all the problems with the new law, it’s a step in the right direction.

Leo Barasi is a former Head of Communications at the UK Drug Policy Commission. He writes in a personal capacity