Economics has been called many things. My first economics class at school demonstrated the concept of scarce resources and the value of specialisation in production. The slightly eccentric teacher did this by distributing a few pairs of scissors, pencils, some paper and compasses among about twenty of us at the start of the lesson and instructing us to make some paper circles, one for each of us. We tried hard, but there were just not enough materials to go round. We all struggled to complete the task for much of the lesson before failing dismally.
At the end of the lesson the teacher explained the fundamental idea in economics of the existence of scarce resources, and the consequent need to specialise. If one or a few people had marked out the circles, another kept the scissors and done the paper cutting, they would have created a division of labour and the task would have been completed in time. One thing that didn’t arise from this was the concept of unemployment: without additional means of production (scissors, compasses, paper) much of the class would have been sat idle, doing nothing. Now, years later, this seems like a glaring omission.
A good workable definition of economics that I like to use is ‘the study of the production and distribution of wealth’. However many mainstream neo-classical economists prefer to focus on the existence of scarce resources. In economic theory, this implies that we are most of the time constrained by supply. Keynes pointed out that for a capitalist economy as a whole, there tends to be unemployment, which fluctuates around a sub-optimal level, as well as spare capacity in industry. He also claimed that, as had happened in the Great Depression, these sub-optimal economic outcomes can persist for some time, with little tendency for the economy to find a full employment equilibrium. Thus Keynes provided a justification for government intervention to improve the state of the economy and reduce unemployment. He recognised that the more usual constraint was a shortage of aggregate demand, his central idea. The neo-classical economics of his time apparently could not explain the huge waste of idle resources, and could not provide a satisfactory solution to reduce the evident human suffering.
If one takes Keynes’ ideas seriously, then for much of the time under developed capitalism, we demonstrably live in a world not of scarcity but of abundant resources in the form of the unemployment of labour and unused industrial capacity. This represents a failure of the system which Keynes thought could be corrected without overthrowing the social order as the Marxists thought would be necessary. He wanted to save capitalism from itself.
Keynesian ideas represented the mainstream in the 1950s and 1960s, which saw unprecedented growth rates and high employment across the capitalist world. They fell out of fashion in the 1970s as many governments faced rising unemployment and inflation together, for which the Keynesian system apparently provided no answer, at least in its popularised version. Attention turned once more to the supply side of the economy, and neo-liberal economics began its ascendancy.
With the advent of the recent Great Recession, economics had to rapidly relearn some form of Keynesianism in the face of the collapse of output and varying degrees of rising unemployment. Interest rates were slashed, and budget deficits allowed to rise rapidly, at least until the turn to austerity. For the more radical post-Keynesians, Keynes never went away, and some of their ilk, such as Steve Keen and Wynne Godley, had used their heterodox models to predict a serious recession in the years prior to 2008. They were not heeded by those in authority, but time proved them right.
Of course, one might argue that natural resources, such as fossil fuels and minerals, or land, are limited in supply and therefore scarce. However, I would caution over such resource supply pessimism. Efficiency in the use of natural resources may be a key constraint on growth, but humanity has been endlessly creative in finding and exploiting new sources of fuel or producing more food from given supplies of land through improved technology. Waves of innovation have been a constant since the birth of capitalism and promise both economies in the use of energy as well as new ways to generate more of it. With the right mixture of government policy and market dynamism, the future promises continued, albeit uneven, progress.
Despite the recognised importance of the supply-side, a stagnating world economy and stubbornly high unemployment in many countries seven years on from the recession demonstrates that the economics of abundance is a vital perspective. Economics might have many definitions, but as we experience a world with a chronic shortage of demand and wasted human resources, Keynesian ideas deserve close scrutiny.