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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How English identity politics will shape the 2017 general election

"English" voters are more likely to vote Conservative and Ukip. But the Tories are playing identity politics in Scotland and Wales too. 

Recent polls have challenged some widely shared assumptions about the direction of UK elections. For some time each part of the UK has seemed to be evolving quite distinctly. Different political cultures in each nation were contested by different political parties and with different parties emerging victorious in each.

This view is now being challenged. Early general election surveys that show the Tories leading in Wales and taking up to a third of the vote in Scotland. At first sight, this looks a lot more like 1997 (though less enjoyable for Labour): an increasingly hegemonic mainland party only challenged sporadically and in certain places.

Is this, then, a return to "politics as normal"? Perhaps the Tories are becoming, once again, the Conservative and Unionist Party. Maybe identity politics is getting back into its box post Brexit, the decline of Ukip, and weak support for a second independence referendum. We won’t really know until the election is over. However, I doubt that we’ve seen the back of identity politics. It may actually bite more sharply than ever before.

Although there’s talk about "identity politics" as a new phenomenon, most votes have always been cast on a sense of "who do I identify with?" or "who will stand up for someone like us?" Many voters take little notice of the ideology and policy beloved of activists, often voting against their "objective interests" to support a party they trust. The new "identity politics" simply reflects the breakdown of long-established political identities, which were in turn based on social class and collective experiences. In their place, come new identities based around people, nations and place. Brexit was never really about the technocratic calculation of profit and loss, but about what sort of country we are becoming, and what we want to be. 

Most social democratic parties in Europe are struggling with this change. Labour is no different. At the start of the general election, it faces a perfect storm of changing identities. Its relationship with working-class voters continues to decline. This is not because the working class has disappeared, but because old industries, with their large workplaces, shared communities and strong unions are no longer there to generate a labour identity. 

Labour is badly adrift in England. The English electorate has become increasingly assertive (and increasingly English). The Brexit vote was most strongly endorsed by the voters who felt most intensely English. In the previous year’s general election, it was fear of Scottish National Party influence on a Labour minority government that almost certainly gave the Tories the English seats needed for an overall majority. In that same election, Labour’s support amongst "English only" voters was half its support amongst "British only" voters. The more "English" the voters, the more likely they were to vote Ukip or Conservative. It shouldn’t be a surprise if Ukip voters now go Tory. Those who think that Ukip somehow groomed Labour voters to become Tories are missing the crucial role that identity may be playing.

So strong are these issues that, until recently, it looked as though the next election - whenever it was called - would be an English election - fought almost entirely in English battlegrounds, on English issues, and by a Tory party that was, increasingly, an English National Conservative Party in all but name. Two powerful identity issues are confounding that assumption.

Brexit has brought a distinctly British issue into play. It is enabling the Tories to consolidate support as the Brexit party in England, and at the same time reach many Leave voters in Wales, and maybe Scotland too. This serendipitous consequence of David Cameron’s referendum doesn’t mean the Tories are yet fully transformed. The Conservative Party in England is indeed increasingly focused on England. Its members believe devolution has harmed England and are remarkably sanguine about a break up of the union. But the new ability to appeal to Leave voters outside England is a further problem for Labour. The Brexit issue also cuts both ways. Without a clear appeal cutting through to Leave and Remain voters, Labour will be under pressure from both sides.

North of the border, the Tories seemed to have found - by accident or design - the way to articulate a familial relationship between the party in Scotland and the party in England. Scottish Conservative leader Ruth Davidson appears to combine conservatism, unionism and distance from English politics more successfully than Scottish Labour, which must ride the two horses of "near home rule" and committed unionism. Scottish Labour has a perfectly good call for a reformed union, but it is undermined by the failure of Labour in England to mobilise enough popular support to make the prospect credible.

Identity politics is not, of course, the be all and end all of politics. Plenty of voters do cast their ballots on the traditional tests of leadership, economic competence, and policy. Labour’s campaign will have to make big inroads here too. But, paradoxically, Labour’s best chance of a strong result lies in taking identity politics head on, and not trying to shift the conversation onto bread and butter policy, as the leaked "talking points" seem to suggest. Plenty of voters will worry what Theresa May would do with the untrammelled power she seeks. Challenging her right or ability to speak for the nation, as Keir Starmer has done, is Labour’s best bet.

 

John Denham was a Labour MP from 1992 to 2015, and a Secretary of State 2007 to 2010. He is Director of the Centre for English Identity and Politics at Winchester University

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