Don’t Dally With Dogma

In recent days, Gordon Brown has hailed a “return to Keynesian economics”, while in an open letter to the Prime Minister from 13 economists, the claim is made that Keynesian economics was proven to be flawed by the experiences of the 1970’s.  Why is it that the name of a Cambridge academic is suddenly being bandied around 62 years after his death? 

As an economics undergraduate, John Maynard Keynes was one of my heroes.  During his esteemed lifetime he represented Britain in the Bretton Woods conference in 1944, was the inspiration behind the creation of the International Monetary Fund and the World Bank and was the author of the seminal book “The General Theory of Employment, Interest and Money”.  One of my other heroes was Milton Freidman, the father of the Monetarist movement that was the influence behind the policies of the Regan and Thatcher era in the 1980’s and whose policies have shaped economic thinking right up to the present day. 

Having both of these famous men as heroes is however unusual, as many people see their policies, and even their politics, as being in stark contrast.  Indeed, they are seen by some as being such opposites that they have sometimes been portrayed as arch rivals, with each being the nemesis of the other.  Clearly such a suggestion is ridiculous – they were economists for goodness sake, not heroes and villains!  But why then is it that so many people have become partisan, adopting the labels of “Keynesians” or “Monetarists” in much the same way as one would the identity of a political party?

I believe that the answer lies in the fact that as human beings we like the idea of rules, as rules are simple; if this happens, do this that and the other and the result will be… The problem is that such simple rules rarely exist outside of the world of science, but we can often fool ourselves into believing that they do.

Keynes came to prominence in the years after the Great Depression of the 1930’s.  In analysing the problems of the day Keynes concluded that the solution was for government to “pump prime” the economy by increasing spending.  The simple thought was that it would be better to employ people to do something productive on behalf of the state than to see them sitting idle.  Moreover, in spending the money they earned, they would themselves be creating additional jobs and income for others.

This simple idea proved to be a turning point and helped lift the global economy out of recession.  The problem was that Keynes’ theories became adopted by many as a gospel truth, applicable in all circumstances.  These people, who Lord Kahn once amusingly referred to as the “Bastard Keynesians”, saw the great man’s theories as a panacea for all ill.  In reality, Keynes was writing about the specific circumstances of a depression, and his limited writings on the circumstances of inflation were largely ignored.

After his death, many of his thoughts and ideas were mistakenly applied in inflationary times with disastrous consequences.
Following the problems of the 1970’s, Ronald Regan and Margaret Thatcher were voted into power.  They were both keen supporters of the Monetarist movement which argued that the solution to inflation was the control of the money supply.  The argument was that if there is a finite supply of goods, then if the amount of money people had to buy those good increased, then the price of the goods would rise, because otherwise there would be a surplus of money left over.  The two would find an equilibrium through the forces of demand and supply.

It was a relatively straightforward concept with the only difficulty being to define what constituted money.
As with Keynes in the 1930’s and 40’s, Freidman’s theories proved to be hugely successful in improving the global economy so, once again, people believed that they had found the winning formula.

But, as with Keynes, Freidman’s theories related to the specific circumstances that pertained at that time.  It is not that one is right and the other wrong, both provided insights that are valuable in different situations.

To argue that we should now turn to Keynesian solutions runs the risk that people will turn to the dogma, not simply look for the ideas that might apply to the current situation.  After all, how many politicians do you think have actually read Keynes’ “General Theory”?

As Albert Einstein once said:
“The problems of today cannot be solved by the same level of thinking that created them.”

About the author
Alistair Schofield is managing director of Extensor Limited and can be contacted at .