Keynes after the crisis.

Author:Backhouse, Roger E.

The short-lived rediscovery of Keynes

In 2008, the world rediscovered John Maynard Keynes as it faced the possibility that there would be a collapse of the banking system leading to another Great Depression.

However, despite the anger that was widely felt towards the bankers and financiers who had created this situation, the crisis was not accompanied by significant financial reform, while the monetary expansion that the government undertook in response to the crisis failed to stimulate investment in the way that had been hoped: the newly created cash was used to reinforce the balance sheets of both the banks and other large corporations, but there was virtually none of the investment in plant and equipment that creates new jobs. Governments ended up acquiring debts that were perceived to be unsustainable, dictating that governments turn their budget deficits into surpluses.

The end result was therefore a reversion to the orthodoxy that Keynes had attacked, according to which recovery depended on cutting public spending, since raising taxation, especially on high incomes, was considered a non-starter. There is much here that still needs to be understood - the way calls for financial reform were stifled and the way it was assumed that cutting deficits meant cutting spending rather than raising existing taxes or designing new ones almost cries out for 'public choice' analysis - but what is clear is that the crisis ended up becoming yet another cue for an assault on the welfare state (1).

Part of the reason, as Tony Judt suggested, is that we are no longer able to imagine a social democratic future:

Why do we experience such difficulty in even imagining a different sort of society? Why is it beyond us to conceive a different set of arrangements to our common advantage? Are we doomed indefinitely to lurch between a dysfunctional 'free market' and the much-advertised horrors of 'socialism'? Our difficulty is discursive: we simply do not know how to talk about these things any more. (Judt, 2010, 34) We no longer have the language in which to justify the type of economy that, from the 1940s to the 1970s, underwrote an increasingly more equal society. Or, to adopt the analysis of the American historian Daniel Rodgers, we have allowed our understanding of the social to become so fractured, or hollowed out, as to be unable to support any convincing alternative to 'free market' economics based on assumptions of rational choice:

Across the multiple fronts of ideational battle, from the speeches of presidents to books of social and cultural theory, conceptions of human nature that in the post-World War II era had been thick with context, social circumstance, institutions, and history gave way to conceptions of human nature that stressed choice, agency, performance, and desire. Strong metaphors of society were supplanted by weaker ones. Imagined collectivities shrank; notions of structure and power thinned out. Viewed by its acts of mind, the last quarter of the (twentieth) century was an era of disaggregation, a great age of fracture. (Rodgers, 2011, 3) If this is right, it follows that the task of solving our economic problems requires us to go deeper than simply working out a new set of policies for economic growth: if such policies are to be possible, our hollowed-out vision of capitalism, in which there is indeed no such thing as society, needs to be replaced with something much richer, for without it there will be no foundation on which the case for reform can be based.

But what has this got to do with Keynes? Keynes has been rejected because he has been seen as no more than the purveyor of a technical remedy for depression whose prescription has been rendered irrelevant by the growing debt crisis: because of high debt, the world cannot afford the luxury of continued deficit spending. Keynesian economics is part of the welfare state, something that, even if it is not acceptable to say so openly, we cannot afford. However, not only does this misrepresent Keynes, but this misrepresentation is of more than historical interest, for it ignores a Keynes who has much to say to our current concerns. We cannot turn to Keynes for a defence of the welfare state. Although his ideas became caught up with the welfare state, this was not one of his passions: though he helped William Beveridge during the Second World War, and though he thought that wealth was too unequally distributed (JMK VII, 374), he was sceptical about the low unemployment targets for which Beveridge aimed. Not only that but, despite his reputation, he was not a supporter of deficit spending. In 1945, he was quite explicit on this when referring to his proposed scheme for financing investment. He wrote: 'It is important to emphasise that it is no part of the purpose of the Exchequer or the Public Capital Budget to facilitate deficit spending, as I understand this term' (JMK XXVII, 406). This statement alone should be sufficient to call into question our reasons for turning aside from...

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