The Middle Man
ECONOMIC POLICY:While a small economy like Ireland cannot stimulate its way out of a crisis, even if the public finances were not in freefall, things can be made worse. And more unjust. Could a return to middle ground of Keynesian economics be the answer?
KEYNES - the man who championed the power of ideas - is back in fashion with a vengeance. We are witnessing a revolution in economic ideas. The passionate debate between Irish economists on Nama shows how economic ideas have been turned upside down, in no time. Economists are not arguing about whether there should be massive state intervention in the economy, but on the technicalities of how it should be undertaken.
John Maynard Keynes successfully challenged the idea of self-correcting or "free" markets in the 1930s. His ideas dominated economics until the early 1970s, with the collapse of the "Keynesian consensus". He urged largescale public intervention in the economy to stimulate demand and so reduce unemployment, funded with borrowings if necessary. This heresy, in the era of the balanced budget, worked for many decades.
In recent times, most economic reports ended with two recommendations: a) more competition (meaning deregulation and privatisation) and b) low taxes (a small state and minimum state intervention). This market fundamentalism infected not just economists, but state regulators and politicians. Everything was for sale, could be measured, marketised, and the state itself could and should be privatised and shrunk to the minimum.
The only role for the state was around what economists call "market failure" and minimum social provision. Today, many Irish economists are Keynesians, with a twist: big, big state spending is for bailing out failed banks, not reducing unemployment.
During a summer visit to the Hall of Mirrors in the magnificently restored Palace at Versailles, my thoughts were not on the grandeur and avarice of the Sun King, Louis XIV, but on the deal made in that room, 90 years earlier. For the Treaty of Versailles imposed such a burden on defeated Germany that it led to the rise of fascism and Hitler.
One man who opposed that deal was John Maynard Keynes. He resigned from the treasury over the harsh terms imposed by Lloyd George, Clemenceau and Wilson. His opposition inspired him to write the Economic Consequences of the Peace in 1919.
Keynes showed both his vision and his compassion for ordinary citizens in this prescient 1919 quote: "The policy of reducing Germany to servitude for a generation, of degrading the lives of millions of human beings, and of depriving a whole nation of happiness should be abhorrent and detestable - abhorrent and detestable, even if it were possible, even if it enriched ourselves, even if it did not sow the decay of the whole civilised life of Europe."
He chillingly predicted it would lead to a "final war" where "the horrors of the late German war will fade into nothing".
His major work, The General Theory of Employment, Interest and Money, was published in 1936. He was a successful economist whose books were bestsellers, but more importantly, his ideas changed the world.
Keynes was a member of the Bloomsbury Group, a creator of the Arts Council, a key player in the first public support for the arts in Britain, a major art collector, and much more. Such was his intellect that the famous philosopher Bertrand Russell said, "When I argued with him, I felt that I took my life in my hands, and I seldom emerged without feeling something of a fool."
Keynes died in 1946 at the age of 62. His ideas fell out of favour in the early 1970s when inflation and stagnation led to the oil crisis. The opposing ideas of Hayek and Friedman in support of the free market and minimum state supplanted his economics. Their ideas were enthusiastically supported by the elites and implemented by Thatcher and Reagan and in many other countries, including Ireland. The policy of unfettered markets, low taxes, financial innovation, vast rewards for a small corporate elite in a more educated society seemed to work for some years. Then it imploded.
Academic economists increasingly withdrew from public debate, pushed aside by a new army of economists employed in financial services. Whether consciously or not, the mission of these economic commissars was to build public support for the new economics, while gaining free corporate advertising from a compliant media. They were aided in building the hegemony by a media increasingly concentrated in fewer hands.
This year, the US government has nationalised most of its automobile industry, poured hundreds of billions of taxpayers dollars in support into the banking industry, taken over private credit markets and increased its already yawning fiscal deficit. Gao Xiqing, president of China Investment Corporation, which is spending billions buying up (nationalising?) strategic assets worldwide, described US economic policy as "socialism with American characteristics".
The main characteristic of this new form of capitalism in many countries is nationalisation, in all but name, of banking and the automobile industry, with ensuing large public-sector deficits. Many Irish economists are still hostile to Keynes' ideas in spite of the collapse of their efficient-market model. A conservative 'Dublin Consensus' is advocating deflationary policies of welfare and wage cuts (ie higher profits, which are unlikely to be invested) which may delay our recovery.
The economy is still in freefall. By next year, 300,000 fewer people will be at work than in 2007 - that means 300,000 fewer people paying taxes. All will have much less to spend. Retail sales have fallen by 21 per cent since then. Foreign travel has collapsed. Imports have collapsed. Irish exports fell by 3 per cent, but this is compared to a collapse of 16 per cent in world trade; this indicates Irish competitiveness has not collapsed. Personal consumption per head for next year will fall back to the level of 2003. Personal debt has soared, as asset values have collapsed. Construction investment will plummet by around 65 per cent in value this year and next. Overall investment will fall by almost as much. But what a fall.
The regressive shift from direct to consumption taxes led to a collapse in these taxes, exacerbating the fall in state revenue. Thus consumption by the state is down by 4 per cent this year. All this is leading to a collapse in economic output of 13 per cent from peak. With such a collapse in the economy, calls for deflationary cuts in social welfare and in wages will make things worse.
While a small economy cannot stimulate its way out of the crisis, even if the public finances were not in tatters, things can be made worse. And more unjust.
Keynes was a brilliant economist who concluded his General Theory railing against "economic society's" unemployment and its "arbitrary and inequitable distribution of wealth and incomes". The Keynesian stimulus packages in Europe and the US may rescue us. But its up to us to use the crisis in both the economy and in economic ideas to build a much better society and a sustainable economy.
Paul Sweeney, economic adviser to Irish Congress of Trade Unions, has written a number of books on the Irish economy and public enterprise and privatisation.
Return of the master - Books on Keynes
KEYNES: THE Return of the Master, by the three-volume Keynes biographer Robert Skidelsky, hails the triumphant return of his ideas. He sees many economists as lagging behind the new reality in their ideas and is scathing of the way economics is taught in most universities. Quite polemical, he relishes the "crisis in conservatism", which brought great economies and societies to their knees. This book is an excellent overview of the current debate in economics.
Peter Clarke's Keynes: Twentieth Century's Most Influential Economistis an entertaining look at the man himself. No dry dismal scientist, Keynes, was the lover of Lytton Stracey and Duncan Grant, the artist, and later married a ballerina. A regular in No 10 Downing Street, he was introduced as "Mr Keynes and another gentleman". He argues Keynes had a lifelong belief in the market "if it could be made to work properly".