Alternatives to Austerity, <\/a>published in July 2015, set out an alternative approach to the continuing recession. This was inspired in considerable measure by Keynes, whose General Theory was published eighty years ago last month.\u00a0 What then is the situation that we face: and what is now to be done?<\/p>\nKeynes was centrally interested in the role of money in a modern capitalist economy.\u00a0 This did not however mean that he looked to monetary policy to steer such an economy, least of all to kick-start growth during a period of recession.\u00a0 In a recession business confidence would be lacking - and however low interest rates were pushed, entrepreneurs would sit on their hands (and their cash) and wait till times got better. Keynes would not therefore have been surprised at the very modest response of the economy to the QE stimulus provided by central banks over recent years.<\/p>\n
Why then have governments continued to look to the central banks to shoulder the main burden of getting the economy out of recession?\u00a0 The reason surely is not any positive belief in the efficacy of monetary stimulus: more the belief that there is no alternative, no other hope on the horizon, especially now that China\u2019s growth has faltered. Why no alternative? Because the high levels of government debt that resulted from their bail-out of the banks \u2013 coupled with the shrinking tax receipts of an economy in stagnation \u2013 have been the prime target of government concern.\u00a0\u00a0 Debt reduction trumps economic growth as the prime objective of government policy, in the UK and the Eurozone in particular. This is in part in the belief that reducing public expenditure will allow the private sector to expand; and in part out of fear of the international money markets.\u00a0 The problem is, that without a return to economic growth, and to more buoyant tax receipts, debt reduction is unlikely to be feasible.<\/p>\n
Is there some other alternative?\u00a0 Here we must notice the varieties of interpretation that have been placed on Keynes\u2019 own work \u2013 in part because he himself addressed the problems of both short and long-term adjustment, and the problems of recession but also (especially during WW2) those of an economy operating close to full capacity.\u00a0 Nevertheless, in these different situations, his recurring theme was that government can and should act to ensure that national resources are fully used and effectively deployed: steering and complementing the functioning of markets, but also reducing the uncertainty about the future which otherwise disables and dispirits entrepreneurs and investors.<\/p>\n
Although Keynes did allow some role for monetary policy, his basic message was that interest rates should be kept stable and low. The heavy work and the fine-tuning would be done by fiscal measures. \u00a0The latter can however take many forms.\u00a0 The first priority \u2013 much emphasised in the General Theory \u2013 was to secure a level of effective demand that would produce full employment and high levels of utilisation of capital equipment. In a recession, when private spending on consumption and investment were low, the immediate priority was therefore to increase public spending, almost regardless of what form this took. \u00a0Spending that created jobs for the unemployed was given pride of place, in part to address a social evil, and in part because the workers thus employed were likely to spend and thus to have multiplier effects across the larger economy.<\/p>\n
This left Keynes being viewed by many as concerned solely with demand management and with public spending geared to soaking up unemployment. It also left many of his interpreters (what Joan Robinson referred to as the \u2018bastard Keynesians\u2019) to argue that once Keynesian expenditure had secured full employment, the market mechanism could be left to do its work, with Keynes having little or nothing else to offer.<\/p>\n
Keynes was not however concerned only with ensuring sufficient effective demand in a recession. More fundamental was his concern over low levels of business confidence and their \u2018liquidity preference\u2019 \u2013 sitting on their hands rather than investing in skills and factories.\u00a0 Only government could provide the stability within which capitalist entrepreneurs and their \u2018animal spirits\u2019 would flourish. The returns that entrepreneurs could expect on their investments and on the inventions they brought to market depended on the general level of activity in the economy and this was itself dependent on public policies.\u00a0 Government policy shaped the environment within which businesses made their long-term investment decisions.\u00a0\u00a0 It was those long-term decisions \u2013 by government and by business \u2013 that then determined the long-term growth potential of the economy, the tax revenues that could be expected and the long-term health of the public finances.<\/p>\n
More generally, Keynes and his successors emphasised the role of public investment in building the long-term capacity of the economy. This might be through investment in infrastructure or human capital or the science base.\u00a0 It would involve long-term projects which were of a scale or duration which no private investor could contemplate. It might involve projects whose benefits were collectively enjoyed but which did not offer realistic returns to any individual private investor.\u00a0 What all these public investments recognised was that capitalist economies develop by expanding and transforming their human and technological capacities; but that this is unlikely to take place at the optimal rate, if investment is left to the private sector. Capitalist economies need to be steered and coordinated. From this point of view, austerity as a way of addressing our economic woes is fundamentally misplaced.<\/p>\n
The world, says the Chancellor, is an uncertain and dangerous place.\u00a0 We must, it seems, hunker down, be thrifty and hope for better times to come.\u00a0\u00a0 Keynes disagreed.\u00a0\u00a0 Precisely because of that uncertainty, governments \u2013 individually and in concert \u2013 must be proactive in managing the global economy and the global markets before whose anxieties and dictates they too readily tremble.\u00a0\u00a0\u00a0 There was a moment following the 2008 crisis when the G20 seemed ready to act together and decisively but it soon faded.\u00a0 Unless the brave but limited efforts of the central banks are now succeeded by vigorous and concerted government action, geared not least to the green technologies we so desperately need, continuing stagnation seems unavoidable.\u00a0 And that in turn may mean growing political discontent and disaffection, social conflict and division.\u00a0 The increasingly dangerous world the Chancellor says he wants to fend off may in that case only be hastened.<\/p>\n","protected":false},"excerpt":{"rendered":"
Nationally and internationally, economic growth \u2013 such as there was \u2013 is faltering.\u00a0 China\u2019s slowdown has prompted falls on the Asian and global stock markets. The US Fed\u2019s signal that interest rates may soon rise \u2013 and QE wind down...<\/p>\n","protected":false},"author":699,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":true,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_post_was_ever_published":false},"categories":[112,116],"tags":[],"class_list":["post-68","post","type-post","status-publish","format-standard","hentry","category-economics","category-evidence-and-policymaking"],"acf":[],"jetpack_featured_media_url":"","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/blogs.bath.ac.uk\/iprblog\/wp-json\/wp\/v2\/posts\/68","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/blogs.bath.ac.uk\/iprblog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blogs.bath.ac.uk\/iprblog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blogs.bath.ac.uk\/iprblog\/wp-json\/wp\/v2\/users\/699"}],"replies":[{"embeddable":true,"href":"https:\/\/blogs.bath.ac.uk\/iprblog\/wp-json\/wp\/v2\/comments?post=68"}],"version-history":[{"count":0,"href":"https:\/\/blogs.bath.ac.uk\/iprblog\/wp-json\/wp\/v2\/posts\/68\/revisions"}],"wp:attachment":[{"href":"https:\/\/blogs.bath.ac.uk\/iprblog\/wp-json\/wp\/v2\/media?parent=68"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blogs.bath.ac.uk\/iprblog\/wp-json\/wp\/v2\/categories?post=68"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blogs.bath.ac.uk\/iprblog\/wp-json\/wp\/v2\/tags?post=68"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}