Yet it’s still Keynes from whom we have most to learn. Not Keynes the economic engineer, who is invoked by his disciples today. But Keynes the sceptic, who understood that markets are as prone to fits of madness as any other human institution and who tried to envisage a more intelligent variety of capitalism. John Gray, BBC News Magazine, 22/7/2012.
Seeing this reminded me that I had forgotten to put up this piece that went on LabourList on 14th August last year.
In his thoughtful analysis on LabourList of our current economic predicament, Anthony Painter quoted Nobel Prize-winning economist Paul Krugman’s view of the eclipse of Keynesian economics. I think Anthony is slightly off the mark to see Krugman’s point as being that ‘it’s difficult to find people to fund debt and deficits on the scale that’s required’. In fact, public spending is limited less by the need to find funding, than by the ability of that spending to properly utilise resources (particularly labour) that the private sector does not. The failure of most of his fellow-economists and almost all policymakers to understand this is the real essence of Krugman’s lament.
Keynes’s starting point was his recognition that an economy is subject to uncertainty – not the sort of uncertainty that can be expressed as a probability and so can be insured against over a number of events or over time, but the situation where in Keynes’s own words ‘we simply do not know’. The ruling paradigm of neoclassical economics does not recognise the possibility that ‘we simply do not know’, so it believes that there is a best outcome for any combination of circumstances and that a free market of informed individuals will arrive at it.
Fortunately quite a lot of human behaviour is reasonably predictable in the short-term. We all have to eat, have somewhere to live, use energy, and so on. The real bite of uncertainty comes in the longer term, as our tastes change in response to new products and circumstances. This is most acute for firms as they try to predict what they will be able to sell us next year or the year after. But this in part depends on what other firms do – their levels of employment and their own use of goods and services. This interdependence and uncertainty over the future can lead to cycles of common exuberance and paralysis in firms’ willingness to spend on the investment that will increase their future output. Keynes was therefore able to explain why the optimal quantity of economic activity tended not to arise spontaneously.
Positive feedback effects – rising asset values encouraging more investment and falling asset values shutting it off – may lead to prolonged booms and slumps, both of which may be damaging to economic and social health. In a slump only government action may be large enough to alter the situation – either by reducing the cost of money through changes in interest rates, or itself introducing new money into the economy by increasing its own purchases of under-used resources.
Keynes also expressed concern about ‘the arbitrary and inequitable distribution of wealth and incomes’, but never extended his theoretical writing to deal with this. If he had, perhaps he would have seen the problem in terms of the ‘quality’ of economic activity rather than its quantity. An inevitable result of economic activity taking place when we simply don’t know what all its outcomes will be, is that profits will frequently accrue not on the basis of the best good or service but on the basis of sheer chance or exploitation of that ignorance. Profit – being available for discretionary spending – conveys power. This power is frequently used to move market outcomes away from those favouring people, our communities and the environment to those giving the greatest profit. This may be done by the use of advertising, political lobbying, predatory pricing and other tactics.
Here positive feedback effects lead not to a general slump or boom, but to a tendency for goods, services and the rewards that come from providing them to flow disproportionately to those individuals, firms and regions already wealthy. So a pattern of increasing individual and regional inequality develops, along with a tendency to the stagnation of productive wealth.
In general, the solutions to this ‘Qualitative Keynesian Effect’ involve improving the quality of market information and the equalising of influence in the market. These might include:
1) More aggressive regulation of advertising, lobbying and market power.
2) Diluting the motivation of large firms to seek profits at the expense of other objectives by reducing their focus on shareholder value. This might be achieved by introducing employee, community and consumer representation onto boards.
3) Lifting the ‘veil’ of money that often hides important market information, by setting up and encouraging direct barter networks.
In addition to this, a tax regime that favours earning and spending (particularly on socially and environmentally useful production) over the accumulation of wealth could have positive ‘Quantitative’ and ‘Qualitative’ Keynesian effects. In other words, we seriously need to consider how to shift the burdens of taxation from income and expenditure to environmental impact, land and wealth.