The Economist Debate: Keynes Vs. The Free Market

The Economist magazine has had an online debate on the proposition that ‘We’re all Keynesians now’. The outcome was not encouraging. By two-to-one that idea was rejected in favour of the free-market. Perhaps some economists haven’t yet learnt that the current day physical realities of the contexts keep shifting, and that the science of human behaviour is ultimately an art, depending on facts but also feelings.

In 1936 the British economist John Maynard Keynes (1883 – 1946) pointed out that in a downturn the economy is operating below its potential, so expanding demand can create supply, which will in turn give people jobs and more prosperity, thus creating (to quote the view in 2009 of the US economist James Furman) an economic ‘virtuous circle’.

That, says Furman (along with many others) is ‘the paradox of economics in a downturn. Normally, the only way to grow the economy is the old-fashioned way: delaying gratification through reduced deficits and increased savings to encourage more investment. But in a downturn, these steps would just compound the problem and worsen the vicious circle of rising unemployment, underutilized capacity and falling consumption.’

We can argue the toss about how much economic ‘growth’ we should pursue in a world which already uses far, far more than it should of environmental resources, but intentionally causing devastating poverty by restricting government and other large-scale spending – the preference of the free-marketeers and monetarists – won’t help.

Socio-economic expectations and sustainability
Sustainable futures depend not only on what will in theory happen next, but what’s happening now.

There is a cost attached to severe recession: the people whom it hurts on a daily living basis get very upset. And upset people become disenfrachised and disaffected – which is in no-one’s interest.

Those of us engaged in regeneration and renewal know only too well, despite the apparent logic of the free market position, that this cannot be the way forward.

The Economist debate
The Economist debate on the theme that ‘We’re all Keynesians now’ is therefore timely; but disappointingly it transpired to be very largely a discussion – or so it seemed – between a cohort of people who work in the financial sector, mostly in the USA…. and who also therefore have huge influence on the lives of us all.

Doing his best for the Keynesians we had Prof. Brad DeLong, professor of economics at the University of California at Berkeley, a research associate of the National Bureau of Economic Research, and in the Clinton administration a deputy assistant secretary of the U.S. Treasury.

Those opposing the Keynesian position were led by Prof. Luigi Zingales of the University of Chicago Booth School of Business, co-author of Saving Capitalism from the Capitalists, acclaimed as “one of the most powerful defenses of the free market ever written”, and co-creator of the Financial Trust Index, an indicator of the level of trust Americans have in financial markets. Prof. Zingales’ position was to defend the idea of the Free Market.

Money or men and women?
There was little discussion in the Economist debate of people as people, and almost none about the extraordinarily complex issues we now face in our global physical environment.

Money and Monetarism or at least the Free Market (themes favoured by the Chicago School of economics) were the positions which, from my reading of the proceedings, ruled the day.

But when we start to disaggregate socio-economic outcomes and impacts in respect of the diverse downturn experiences of different people (gender, age, physical state, cultural background and other factors) it is very hard – in both the intellectual and the affective sense – not to go for Keynesianism.

Haves and Have Nots
Other, more austere, approaches may seem attractive in the long-run to people who won’t in the interim really go without; but surely even they recognise that the legacy of a deeply disenfranchised social hinterland – under-educated and sick children, depressed and impoverished families without focus, and all the rest – will not be an advantage in times to come?

We have to keep people in work as far as possible (preferably eco- and socially sustainable schemes), or we risk more than we may gain. It’s how the Keynesian approach is handled that really matters.

Sustainability is no longer a given
Yet most commentators continued to debate as though everything ‘except’ the economy will stay the same. It won’t; and the versatility of neo-Keynesianism surely helps us here more than the strictures of the Chicago School .
Gas /oil, carbon, water… one or more of these will become the major financial ‘currency/ies’ of the future; and my guess is that the new gold-standard currency will soon be simply knowledge.

If economics can’t take account of these factors in meaningful, rather than soul-less, ways, we’re in for a rougher ride even than needs be already.

Keynes was creative
Nor did I see much about John Maynard Keynes the person in this debate.
Wasn’t Keynes a man with a wide range of interests, a member of the Bloomsbury Group (that intellectual and progressive force in the London of the 1930s), married to the ‘Bloomsbury Ballerina‘ Lydia Lopokova, a talented Russian ballet dancer?

Wouldn’t Keynes have been worried to read about the sterile dehumanised theoretical models which continue to be proposed by the Monetarists and Free Marketeers? What if anything, he might have asked, has been learnt in the past eighty years?

Imagination in the face of multiple challenges
Only Keynesian-style approaches accommodate the changing realities of life across the globe for millions upon millions of different people (men and women in many diverse cultures, all cruelly hit by the credit crunch) who simply can’t live without jobs of some sort, because they have no resource other than their daily labour.

Surely Keynes would have urged us to use imagination as well as mathematical models, to try to resolve the dilemmas we now face.

How can we cope, all at the same time, with economic crises, climate change, famine and much else, unless we seek the application of intentionally humane and decent economic frameworks?

Decision-makers and destinies
It’s worrying that so few of the Economist’s debaters looked outside their models to the contexts in which we actually live. They are after all also generally the people in the private sector (and in right wing governments) who decide what to do with ‘their’ economies.

The Free Market folk undoubtedly believe they have incorporated human motivation and behaviours into their models. The problem seems to be that – the behaviour perhaps of economists themselves apart? – rationality has little to do with behaviour in reality; and in any case the language of the Chicago School does belies an understanding of the human condition for ‘ordinary’ people.

Perhaps – could it have been said before? – such people simply don’t count in the face of the Free Market?

Humanity and economics are inseparable
Recent experience in developing sustainable communities has seen those in regeneration forced to understand it’s not just logic which influences how people behave; we ignore their humanity and need for stakeholding and inclusion at our peril.

The same applies in the face of terrifying outcomes if we get the economics wrong. A lot more insight into the day to day realities of the human condition is required.

[Some of the observations above were also published as a contribution to The Economist debate itself.]