Not All Keynesian Spending Is Equal

Yves here. Richard Murphy makes an extremely important point about how Keynes’ belief in the importance of well-functioning, cohesive societies and how sound economic policy could promote them. However, he skips over the fact that Keynes did not approve of much of Keynesian thinking, particularly the American Keynesianism developed and promoted by Paul Samuelson.

Samuelson had done his PhD thesis on neoclassical economics and admitted he had difficulty wrapping his mind around Keynes. An English economist, John Hicks, had developed a mathematical formalization that treated Keynesian theory simply as a special case of neoclassical economics, and that was embraced by Samuelson and his fellow travelers. Not only did Keynes repudiate Hicks, Hicks recanted his own work in his later life.

Admittedly, the most important difference between Keynes and these Keynesian knockoffs is their view of instability. Keynes viewed economies as inherently unstable; investors could freak out and withhold liquidity, which would dampen and even crash real economy activity. Economists like Samuelson who aspired to turn economics into a science recoiled at this view, since it meant they would not be able to model economic behavior in mathematical terms (for instance, recently retired professor Mark Thoma who taught macroeconomics said any macroeconomic modeler who was honest would have to admit their forecasts for more than six months out were unreliable).

So Samuelson and other mainstream economists embraced the assumption of ergodicity…that economies have a natural propensity to stability, and that stable state is one of full employment! For a longer-form discussion, see Chapter 2 of ECONNED or Paul Davidson’s The Keynes Solution.

Putting the “Keynesian” nitpicking aside, Murphy is correct to point out the need for governments to deliver what Lambert likes to stress as “material concrete benefits” for citizens. The Democratic party civil war between the progressive upstarts and the leadership is all about the growing and well-founded perception that government in the US is increasingly about promoting redistribution to and rent extraction by the rich at the expense of everyone else.

MMT proponents similarly make central the notion that government spending is constrained by real economy productive capacity. By implication, they would favor spending that increases capacity, such as infrastructure spending, more day care and after school programs to help working parents, and increased elder care.

By Richard Murphy, a chartered accountant and a political economist. He has been described by the Guardian newspaper as an “anti-poverty campaigner and tax expert”. He is Professor of Practice in International Political Economy at City University, London and Director of Tax Research UK. He is a non-executive director of Cambridge Econometrics. He is a member of the Progressive Economy Forum. Originally published at Tax Research UK

The Guardian has an editorial this morning on Keynes and Keynesianism. In it they argue that:

In 1976 it was a British Labour prime minister, James Callaghan, who pronounced Keynesianism dead.

As they then note:

Monetarism, the economic theory that took over, has failed.

They then argue, reflecting a theme that I raised last week, that what we are seeing in response is that:

Many authoritarians are now using state power to lock in the dominance of the rich.

I think this indisputable.

I also think that the editorial missed a killer punch. That was, first of all, because they kept referring to Keynes, and not his motives, and yet it is his motives, and their contrast with those of monetarism that is critical. Keynes was motivated by social concern: monetarism was motivated by the desire for private profit. Keynes was about creating fairer societies, and monetarism was about creating inequality.

It is then appropriate to say, as the Guardian do, that:

Austerity meant the economy was starved of demand when inflation was low. The answer is for governments to spend.

But [the right are] not talking about the state intervening on the side of labour, redistributing wealth or socialising investment. Instead, the right now proposes a Keynesianism without Keynes.

This is correct, and yet it needs contextualisation. We have just seen an election where policies in the shadow of Keynes did not prevail. Whilst nationalisation, social housebuilding, the welfare state and much else that might be associated with Keynesian policy all poll well with focus groups they did not deliver election success for Labour.

Nor, come to that, did the Green New Deal in the way that Labour presented it. And that is because Keynes did not just want these things, as if they in themselves mattered. What he was particularly interested in, I suggest, was what they could deliver for people. In other words, what he wanted to address was not just an economic crisis, but the oppression of people’s hopes and aspirations and their replacement by fear. He knew he was fighting fascism, and he played a key role in achieving that goal.

This is the point that I think the Guardian misses. A new dose of Keynesianism is not enough. Nor, most especially, is a bout of non-Keynesian government spending. Keynesian spending is about transforming relationships in society. It is, then, about much more than the spend itself.

I believe that the Green New Deal, when properly done, is exactly that. It is aspirational. Instead of Labour being paranoid about the private sector gaining advantage from it, I would have every hope that a plethora of new businesses will be promoted by Green New Deal activity. Wouldn’t that make sense?

And I would hope too that the training programs, which have to be at the absolute core of everything that the Green New Deal does or no progress can be made, will provide skills for life, and not just for retrofitting insulation and triple glazed windows.

The spending that the government is now proposing is all about reinforcing Conservative control, and at its best that is about the maintenance of a power elite. The Green New Deal is all about the diversification of power to people and localities.

Both policies have at their core increased public spending. But one delivers that spending to maintain the status quo. The other spends to change that status quo for the benefit of all in society. Not all, then, is equal in what looks like Keynesian spending. In fact, the opposite is very much the case. And that has to be said, time and again.

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