Keynes on inequality

As the last post before Christmas, here is Keynes on inequality and economics, taken from his General Theory. Some sound thoughts to dwell upon in today’s society:

“For my own part, I believe there is social and psychological justification for significant inequalities of incomes and wealth, but not for such large disparities as exist today. There are valuable human activities which require the motive of money-making and the environment of private wealth-ownership for their full fruition. Moreover, dangerous human proclivities can be canalised into comparatively harmless channels by the existence of opportunities for money-making and private wealth, which, if they cannot be satisfied in this way, may find their outlet in cruelty, the reckless pursuit of personal power and authority, and other forms of self-aggrandisement. It is better that a man should tyrannise over his bank balance than over his fellow-citizens; and whilst the former is sometimes denounced as but a means to the latter, sometimes at least it is an alternative. But it is not necessary for the stimulation of these activities and the satisfaction of these proclivities that the game should be played for such high stakes as at present.”

Influence or control? How far can governments manage our economic destiny?

Contando_Dinheiro_(8228640)During the so-called ‘Golden Age of Capitalism’ in the 1950s and 1960s, the capitalist world economy was unprecedentedly successful. In the rich world, unemployment and inflation were low, and average productivity and real wages rose year after year for the majority of the workforce. In many poor countries, in the wake of independence from colonial rule, industrialisation began in earnest.

In both cases, interventionism was the fashion, encouraged by the experiences of some success in wartime planning, through a resolution not to repeat the economic collapse into the Great Depression of the 1930s and a belief in collective action. The ideas of Keynes and his followers were influential. Continue reading

Was the Fed to blame? Rebalancing and an exit from economic stagnation and crisis

599px-The_Blue_MarbleWas one of the causes of the Great Recession excessively low interest rates in the US? And if so, was the Federal Reserve to blame? I would argue that both questions can be answered the same way: partly. I say this because in some ways the mandate of the Fed left it with no choice but to leave interest rates in the early 2000s at very low levels, contributing to a house price boom and excessive growth in private debt which, when the bubble burst, led to a deep recession. This sequence of events happened in many rich countries. Continue reading

The philosophy of economic policy-making: Keynes on ‘The End of Laissez-Faire’

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John Maynard Keynes

Should government intervene in economic life? In advanced countries it does so extensively. Laissez-faire literally means ‘let (it/them) do’ or ‘let go’ and is a doctrine which preaches non-interference by government in the economy. In my view, it is not so much whether or not government should in many cases intervene, but how.

Here is Keynes, writing in 1926:

“It is not true that individuals possess a prescriptive ‘natural liberty’ in their economic activities. There is no ‘compact’ conferring perpetual rights on those who Have or those who Acquire. The world is not so governed from above that private and social interest always coincide. It is not a correct deduction from the Principles of Economics that enlightened self-interest always operates in the public interest. Nor is it true that self-interest generally is enlightened; more often individuals acting separately to promote their own ends are too ignorant or too weak to attain even these. Experience does not show that individuals, when they make up a social unit, are always less clear-sighted than when they act separately.”

From right to left, rich country governments often intervene to curry favour with particular interest groups. Sometimes these might come close to some kind of majority, though they often do not. This kind of intervention, while it is in some cases regrettable, is probably inevitable, especially in democracies with their constant pressure for politicians to respond to events.

To quote Bill Clinton when he first ran for president, ‘it’s the economy stupid’: the material conditions of life are part of our modern conception of ‘well-being’. If the economy is failing the many, governments can and must act to improve things. Across the world they failed to see the 2008 financial crisis coming, and could only really prevent it becoming another Great Depression. This was better than no response at all, or ‘laissez-faire’. Despite unprecedented intervention, at least for while, we still have not shaken off the legacy of this crisis, despite some degree of recovery in the US and UK.

Economics would therefore be better off termed political economy, as it used to be. This would help to make it clear that issues such as power, conflict, inequality and justice and the attempts to grapple with them by politicians and citizens, as individuals or as social groups, are inevitably connected with economic life as it moves along.

Minsky on the management of capitalism

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Hyman Minsky

The late Hyman Minsky, whose ideas on financial crises have seen a revival during the recent turmoil, writing in 1975:

“In order to understand the policy issues confronting advanced capitalist countries today it is necessary to return to the issues that were central to the fundamental debate that took place in the 1930s on the relative merits of capitalism and socialism. If one comes down, as Keynes did, on the side of a mixture that sustains the basic properties of capitalism, it is not because of the virtues of unconstrained capitalism but rather in spite of its defects, which, though great, can in principle be controlled. But if capitalism is to be controlled so that the basic triad of efficiency, justice, and liberty is achieved, then the design of the controls will have to be enlightened by an awareness of what was obvious to Keynes – that with regard to both the stability of employment and the distribution of income, capitalism is flawed.”