Unreconstructed Keynesianism is alive and well

In a recent video interview in the Daily Telegraph (October 7, 2010), Keynes’s biographer, the noted historian Professor Lord Skidelsky, gives us the benefits of his views on what Keynes would have thought of current economic policies.

His main point is that Keynes would have been appalled at the “economic illiteracy” of the current government and in particular by its concern with the deficit. The view that the government deficit could be compared to the credit card spending of an ordinary household was, to paraphrase his argument, to show a level of economic illiteracy that would get “0 out of 10 in any economics paper”.

He then went on to argue for more deficit spending along standard Keynesian lines, whilst criticising those who wanted deficit cuts as coming from some inflexible nostrum that did not take account of the current state of the economy.

This is unreconstructed Keynesianism at its very worst.

• Let’s leave aside the awkward facts that textbook Keynesian policies didn’t work in the 1930s, in this country or in the US, that they created a stagflationary nightmare in the early 1970s that took this country to the brink of collapse, and were repudiated after much soul-searching by Labour PM Jim Callaghan in 1976, after which the economy began to recover.
• Let’s leave aside the fact that Geoffrey Howe in his famous 1981 budget courageously decided to cut the deficit in the middle of a deep recession; the Keynesian establishment howled and warned that this would produce disaster, but the economy recovered strongly.
• Let’s leave aside the fact that the policies that many Keynesians now advocate were tried for the best part of two decades in Japan and failed.
• Let’s leave aside the fact that high government spending, high taxes and an insouciance about the deficit were key factors in the creating the macroeconomic backdrop to the current crisis.

Yet despite this dismal record the followers of Keynes still push the tired old policies of deficit spending like a broken record. The analysis and remedy is always the same: demand is too low, so expand government spending and increase the deficit.

And still Skidelsky criticises others for having an inflexible nostrum! When did they ever say, “Well guys, we have had enough deficit spending for now”? (Apologies in advance: if any of them did, I missed it.) Of course, why would they ever oppose deficits, as they have a blinkered view of deficits that tells them that deficits can only ever be good?

Whatever Keynes would have said now — who really knows? and more importantly, does it really matter? — it beggars belief to suggest that the deficit does not matter, especially in the current economic environment. The UK is already in an insolvency crisis and big international investors are already very nervous. Ignoring the deficit (with explicit government debt now about 70% of GDP and rising fast) will soon lead to the erosion of the country’s credit rating which will make the Government’s financial problems very much worse and, potentially, lead to a Greek-style crisis. This looming fiscal crisis is already crippling government finances and the financial burden and uncertainty it creates are key factors undermining economic confidence and holding the economy back.

Furthermore,  the long-term prognosis for the UK is much worse than the 70% debt/GDP ratio would suggest, as this ignores the vastly greater ‘hidden’ debt that the government has already accumulated off-balance sheet.

There is also a huge intergenerational issue here: youngsters coming onto the job market face the prospect working all their life to pay off enormous debts already incurred for them, often before they were born, to pay for the pensions, medical and other benefits to be received by their elders, in the full knowledge that there will be nothing left for them when they get old themselves. The pension system is, in effect, a massive Ponzi scheme, and they are the ones being ripped off. You try telling them that a debt of perhaps £200,000 over a lifetime doesn’t matter, especially when they have to pay it and that debt is incurred merely by virtue of entering the labour force – a kind of entry tax to the labour market, as if they had the choice not to enter it!

In the long-term, economic prosperity depends on the old verities of the Children’s Copybook: hard work, trust, integrity, prudence, and the importance of capital accumulation and saving. These are the pillars on which the economy depends, and yet Keynes and his followers systematically attacked each of these as if they were useless relics from an earlier age:

• They undermined hard work by oppressive taxation, ludicrous welfare systems and, more generally, state intervention into the economy, gravely weakening the link between work and reward, and turning the capitalist system into an ugly and corrupt form of crony capitalism in which hard work is penalised and what really matters is political influence.
• They undermined integrity and trust in our economic institutions, not least in the banks and government itself, and they undermined the currency by abandoning the discipline of the gold standard. But we should not be so surprised: Keynes was a self-confessed immoralist who had no time for conventional systems of morality: the idea that governments should keep their word, and so forth, was old hat, another Victorian hang-up; governments could and should do whatever they wanted … provided they took his advice.
• They mounted a sustained attack on saving: they undermined saving by low interest rates, inflation and oppressive taxation. They constantly preached the message – and still do – that saving was a social evil and should be discouraged. However, in the longer term, lower saving means low capital accumulation, and lower capital accumulation means low growth and stagnation, and lower living standards. (But never mind this: in the long-term, as the Great Man said, we are all dead anyway.)

Part of the reason for the continued influence of Keynesian ideas is that his followers managed to establish an iron grip on academia that remains to this day. One only has to look through the standard economics course syllabi and associated textbooks to see this: students are taught a “Cowboys and Indians” Keynes vs Friedman debate that is, in essence, still strongly Keynesian in its underlying assumptions. Pre-Keynesian schools of thought are represented by a largely fictional ‘classical economics’ that serves as a useful straw man. The key issues of the role of the state in the economy are rarely addressed; economics students no longer get a sense of the broader social, moral and philosophical issues on which economic questions ultimately depend, and have little or no sense of economic history. Economics is relegated to mere technical analysis (and bad technical analysis at that), devoid of any meaningful context.

Amongst all of this, the (largely unspoken) message is all too successfully conveyed: that there is only one way to think about these issues – their way. A student can go all the way through University, even up to PhD level, and still have no sense of there being any reasonable alternatives. Other schools of thought – especially pre-Keynesians and the Austrian school – don’t get a look-in. Thus, we continue to produce thousands of economics graduates – educated idiots, in effect – who are blinkered by their models and have little grasp of true economic problems, especially macroeconomic ones.

With “experts” like these, I would prefer to take my chance with the gut instincts of the man on the street … and on that front there is hope yet: almost all the comments in the discussion thread following the Telegraph video were highly critical and rightly so. When it comes to economics vs. common sense, the latter wins hands down: I will happily settle for my 0/10 on Professor Skidelsky’s economic literacy course.

Towards the end of his General Theory Keynes warned that the power of vested interests was vastly overrated compared to the power of ideas: “Practical men … are usually the slaves of some defunct economist,” he wrote. In this he was surely right. It is high time that his followers woke up to the fact that it is Keynes himself who is now the “defunct economist”.”

There are alternatives and we must look at them: Keynesianism is washed up.