WORLD VIEW:MILTON FRIEDMAN, the Chicago economist and theorist of monetarism, justified intellectual preparedness for periods of major change as follows: "Only a crisis, actual or perceived, produces real change. And when the crisis occurs, the change depends on the ideas that are lying around . . . Our basic function [is] to keep the ideas ready until the politically impossible becomes politically inevitable," writes Paul Gillespie.
His advice proved profoundly correct during the late 1970s and early 1980s when his ideas were taken up by Margaret Thatcher and Ronald Reagan first in opposition and then in power. They were responding to the endemic problem of stagflation, combining economic slump, unemployment and inflation, that arose from the two energy shocks of 1973 and 1979. Monetarism shifted the emphasis from the demand side of the economy towards regulating the supply of money. It was developed by Friedman as a critique of Keynesian macroeconomics, which had dominated the profession in post-war years.
The wheel has now turned decisively back to John Maynard Keynes, the British economist and policymaker who theorised the way out of the 1930s depression and whose ideas proved immensely influential in planning the post-war recovery. It was after the collapse in 1972 of the fixed exchange rates agreed between major currencies at the 1944 Bretton Woods conference, under Keynes's influence, that the problems began. He had led the gruelling negotiations with the US which transferred basic reserve currency status from sterling to the dollar in return for post-war loans.
Ironically, it was Richard Nixon who coined the phrase "we are all Keynesians now" a year before the dollar broke away from the fixed system, triggering the turmoil that led to its suppression as a doctrine.
This year it has been revived with a vengeance as US policymakers abandoned a generation's orthodoxy to spend huge sums on rescuing the banking system and pump-prime public demand for goods and services. In his Financial Timescolumn on December 24th Martin Wolf repeated the phrase, and with good reason. Noting that Barack Obama is about to implement a huge fiscal stimulus package, he argues that the pragmatic, results-based approach is the most relevant for now.
It is worth recalling Keynes's observations about the role of ideas in the conclusion of his 1936 master work, The General Theory of Employment, Interest and Money: "The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back . . . soon or late, it is ideas, not vested interests, which are dangerous for good or evil."
One does not have to agree that ideas are determining to acknowledge that they are central to policymaking, especially in economics.
There are in fact several varieties of Keynesian economics on offer. But they stand outside the mainstream of neo-classical economics as the discipline has been developed over the last 30 years. This means there are not that many fully formulated such ideas lying around waiting to be implemented now that the politically impossible has become inevitable once again with the collapse of neoliberal orthodoxy.
Barack Obama's economic team, committed to a major fiscal stimulus, contains many adherents of that orthodoxy, including those who helped design the financial deregulation in the late 1990s which contributed so mightily to last year's crisis.
They too are having to come to terms with the brutal resurrection of depression economics explored in Paul Krugman's recent book on the subject. In it he recalls a lecture given by Robert Lucas - a successor of Friedman's at the University of Chicago in 2003 and, like Krugman, a Nobel Prize winner in economics - to the effect that the "central problem of depression-prevention has been solved, for all practical purposes". Because it was now understood how to tame the business cycle, economics could move on to technological progress and long-term growth.
Krugman says what is now needed is a rescue operation for the US and world economies. It needs to be carried out in the spirit of Keynes's approach to political economy, in which the role of political leadership and state action are central. If that involves a pragmatic move to the left, so be it, he concludes; but this will be in order to restore a functioning capitalist system rather than to move beyond it. The basic problem is to restore growth based on effective demand.
Like Keynes, Krugman is capable of writing accessibly for a general audience, which is one key to influencing public attitudes and policy. But Keynesianism itself is criticised not only by neoclassical theorists but also by Marxists and Greens. Both have important points to make, of which we will undoubtedly hear more this year.
The Greens say it is not enough to restore growth by reconfiguring demand towards renewed consumption because ecological limits have been reached.
Marxists argue that the underlying cause of the 1930s economic disaster, like this one, was a fundamental shift of income shares away from wages/consumption to corporate profits which produced a tidal wave of surplus capital that could not be profitably invested in goods production - and, in fact, was not invested in goods production.
Capitalism, too, has reached its limits, and can no longer guarantee human progress.
The year will tell which of these sets of ideas is most ready for this systemic convulsion.