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.

 

Getty
Show Hide image

Find the EU renegotiation demands dull? Me too – but they are important

It's an old trick: smother anything in enough jargon and you can avoid being held accountable for it.

I don’t know about you, but I found the details of Britain’s European Union renegotiation demands quite hard to read. Literally. My eye kept gliding past them, in an endless quest for something more interesting in the paragraph ahead. It was as if the word “subsidiarity” had been smeared in grease. I haven’t felt tedium quite like this since I read The Lord of the Rings and found I slid straight past anything written in italics, reasoning that it was probably another interminable Elvish poem. (“The wind was in his flowing hair/The foam about him shone;/Afar they saw him strong and fair/Go riding like a swan.”)

Anyone who writes about politics encounters this; I call it Subclause Syndrome. Smother anything in enough jargon, whirr enough footnotes into the air, and you have a very effective shield for protecting yourself from accountability – better even than gutting the Freedom of Information laws, although the government seems quite keen on that, too. No wonder so much of our political conversation ends up being about personality: if we can’t hope to master all the technicalities, the next best thing is to trust the person to whom we have delegated that job.

Anyway, after 15 cups of coffee, three ice-bucket challenges and a bottle of poppers I borrowed from a Tory MP, I finally made it through. I didn’t feel much more enlightened, though, because there were notable omissions – no mention, thankfully, of rolling back employment protections – and elsewhere there was a touching faith in the power of adding “language” to official documents.

One thing did stand out, however. For months, we have been told that it is a terrible problem that migrants from Europe are sending child benefit to their families back home. In future, the amount that can be claimed will start at zero and it will reach full whack only after four years of working in Britain. Even better, to reduce the alleged “pull factor” of our generous in-work benefits regime, the child benefit rate will be paid on a ratio calculated according to average wages in the home country.

What a waste of time. At the moment, only £30m in child benefit is sent out of the country each year: quite a large sum if you’re doing a whip round for a retirement gift for a colleague, but basically a rounding error in the Department for Work and Pensions budget.

Only 20,000 workers, and 34,000 children, are involved. And yet, apparently, this makes it worth introducing 28 different rates of child benefit to be administered by the DWP. We are given to understand that Iain Duncan Smith thinks this is barmy – and this is a man optimistic enough about his department’s computer systems to predict in 2013 that 4.46 million people would be claiming Universal Credit by now*.

David Cameron’s renegotiation package was comprised exclusively of what Doctor Who fans call handwavium – a magic substance with no obvious physical attributes, which nonetheless helpfully advances the plot. In this case, the renegotiation covers up the fact that the Prime Minister always wanted to argue to stay in Europe, but needed a handy fig leaf to do so.

Brace yourself for a sentence you might not read again in the New Statesman, but this makes me feel sorry for Chris Grayling. He and other Outers in the cabinet have to wait at least two weeks for Cameron to get the demands signed off; all the while, Cameron can subtly make the case for staying in Europe, while they are bound to keep quiet because of collective responsibility.

When that stricture lifts, the high-ranking Eurosceptics will at last be free to make the case they have been sitting on for years. I have three strong beliefs about what will happen next. First, that everyone confidently predicting a paralysing civil war in the Tory ranks is doing so more in hope than expectation. Some on the left feel that if Labour is going to be divided over Trident, it is only fair that the Tories be split down the middle, too. They forget that power, and patronage, are strong solvents: there has already been much muttering about low-level blackmail from the high command, with MPs warned about the dire influence of disloyalty on their career prospects.

Second, the Europe campaign will feature large doses of both sides solemnly advising the other that they need to make “a positive case”. This will be roundly ignored. The Remain team will run a fear campaign based on job losses, access to the single market and “losing our seat at the table”; Leave will run a fear campaign based on the steady advance of whatever collective noun for migrants sounds just the right side of racist. (Current favourite: “hordes”.)

Third, the number of Britons making a decision based on a complete understanding of the renegotiation, and the future terms of our membership, will be vanishingly small. It is simply impossible to read about subsidiarity for more than an hour without lapsing into a coma.

Yet, funnily enough, this isn’t necessarily a bad thing. Just as the absurd complexity of policy frees us to talk instead about character, so the onset of Subclause Syndrome in the EU debate will allow us to ask ourselves a more profound, defining question: what kind of country do we want Britain to be? Polling suggests that very few of us see ourselves as “European” rather than Scottish, or British, but are we a country that feels open and looks outwards, or one that thinks this is the best it’s going to get, and we need to protect what we have? That’s more vital than any subclause. l

* For those of you keeping score at home, Universal Credit is now allegedly going to be implemented by 2021. Incidentally, George Osborne has recently discovered that it’s a great source of handwavium; tax credit cuts have been postponed because UC will render such huge savings that they aren’t needed.

Helen Lewis is deputy editor of the New Statesman. She has presented BBC Radio 4’s Week in Westminster and is a regular panellist on BBC1’s Sunday Politics.

This article first appeared in the 11 February 2016 issue of the New Statesman, The legacy of Europe's worst battle