Robert Skidelsky’s economic policy mess
“When John Maynard Keynes talked of persistent under-employment, he did not mean that, following a big shock, economies stay frozen at one unchanging level of depressed activity. But he did think that, without external stimulus, recovery from the lowest point would be slow, uncertain, weak, and liable to relapse. His ‘under-employment equilibrium’ is a form of gravitational pull rather than a fixed condition.”
Or so it is argued by Robert Skidelsky in a recent article. He contrasts his Keynesian views with this.
“Contrary to Keynes, orthodox economists believe that, after a big shock, economies will ‘naturally’ return to their previous rate of growth, provided that governments balance their budgets and stop stealing resources from the private sector.”
These orthodox economists, according to Skidelsky again, base their reasoning not on business fears of government bankruptcy. Rather, what they are worried about is the “governments’ determination to balance the books, that is reducing business confidence by lowering expectations of employment, incomes, and orders.”
I agree with Skidelsky in thinking these “orthodox” economists – if that is what they believe – are so far off beam that they will never get it straight. The notion that economies are being held back because business people have taken on board and are reacting to macroeconomic forecasts of harder times ahead, that they are cutting back production today because of the forecasts they have themselves made, is about as ridiculous an economic theory as it is possible to conceive.
Business people do not react to the total economy; they react to their own order books. What is causing the slow, painful recoveries we see everywhere is that governments have diverted immense parts of our productive effort into useless non-value-adding forms of production. Demand for output will not rise because we are not producing goods and services from which real increases in incomes can be earned. Without such real increases in our ability to buy, we cannot purchase what others have produced. Demand, as was once understood, is constituted by value adding supply.
I therefore completely agree with Skidelsky where he writes:
“The trouble is that the current crisis finds governments intellectually disabled, because their theory of the economy is a mess.”
It is just that he and I disagree about which aspects of the prevailing theory actually are in a mess. Since governments did more or less what Skidelsky recommended back in 2009, he should have a good hard look at the theory he is still trying to peddle. More debt and wasteful spending is not the answer. Most people, looking at the damage that such policies have caused, are beginning to understand this for themselves.
Unfortunately, they, along with their governments, have no active theories to help them find their way out of the phenomenal mess we are in. Still, they are working it out as they finally begin to cut back on expenditure and work their way towards more market-based solutions.
But this can clearly be said: wherever the answers are, they are not to be found in any of the Keynesian instruction manuals now in use.