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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Theresa May’s stage-managed election campaign keeps the public at bay

Jeremy Corbyn’s approach may be chaotic, but at least it’s more authentic.

The worst part about running an election campaign for a politician? Having to meet the general public. Those ordinary folk can be a tricky lot, with their lack of regard for being on-message, and their pesky real-life concerns.

But it looks like Theresa May has decided to avoid this inconvenience altogether during this snap general election campaign, as it turns out her visit to Leeds last night was so stage-managed that she barely had to face the public.

Accusations have been whizzing around online that at a campaign event at the Shine building in Leeds, the Prime Minister spoke to a room full of guests invited by the party, rather than local people or people who work in the building’s office space.

The Telegraph’s Chris Hope tweeted a picture of the room in which May was addressing her audience yesterday evening a little before 7pm. He pointed out that, being in Leeds, she was in “Labour territory”:

But a few locals who spied this picture online claimed that the audience did not look like who you’d expect to see congregated at Shine – a grade II-listed Victorian school that has been renovated into a community project housing office space and meeting rooms.

“Ask why she didn’t meet any of the people at the business who work in that beautiful building. Everyone there was an invite-only Tory,” tweeted Rik Kendell, a Leeds-based developer and designer who says he works in the Shine building. “She didn’t arrive until we’d all left for the day. Everyone in the building past 6pm was invite-only . . . They seemed to seek out the most clinical corner for their PR photos. Such a beautiful building to work in.”

Other tweeters also found the snapshot jarring:

Shine’s founders have pointed out that they didn’t host or invite Theresa May – rather the party hired out the space for a private event: “All visitors pay for meeting space in Shine and we do not seek out, bid for, or otherwise host any political parties,” wrote managing director Dawn O'Keefe. The guestlist was not down to Shine, but to the Tory party.

The audience consisted of journalists and around 150 Tory activists, according to the Guardian. This was instead of employees from the 16 offices housed in the building. I have asked the Conservative Party for clarification of who was in the audience and whether it was invite-only and am awaiting its response.

Jeremy Corbyn accused May of “hiding from the public”, and local Labour MP Richard Burgon commented that, “like a medieval monarch, she simply briefly relocated her travelling court of admirers to town and then moved on without so much as a nod to the people she considers to be her lowly subjects”.

But it doesn’t look like the Tories’ painstaking stage-management is a fool-proof plan. Having uniform audiences of the party faithful on the campaign trail seems to be confusing the Prime Minister somewhat. During a visit to a (rather sparsely populated) factory in Clay Cross, Derbyshire, yesterday, she appeared to forget where exactly on the campaign trail she was:

The management of Corbyn’s campaign has also resulted in gaffes – but for opposite reasons. A slightly more chaotic approach has led to him facing the wrong way, with his back to the cameras.

Corbyn’s blunder is born out of his instinct to address the crowd rather than the cameras – May’s problem is the other way round. Both, however, seem far more comfortable talking to the party faithful, even if they are venturing out of safe seat territory.

Anoosh Chakelian is senior writer at the New Statesman.

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