Winner of the New Statesman SPERI Prize in Political Economy 2016

Tuesday, 28 April 2015

The wrong kind of political economy

Thanks to Google I get to see when someone writes about me, so I read an article by Ryan Bourne in CityAM. It basically says that while Keynesians keep saying that their models have been vindicated by the economic effects of austerity (but economists always disagree with each other blah blah), they have lost the political debate. In the case of the UK, even Labour is no longer Keynesian. While Labour are planning hardly any additional austerity, but the Conservatives are planning a lot, according to Mr. Bourne Labour are not justifying this less contractionary stance in Keynesian terms.

For the sake of argument, let us assume that Mr. Bourne is correct about Labour. We also need to ignore the SNP of course. Suppose Mr. Bourne is right that Keynesians have lost the political argument. This line is not new, with more authoritative newspapers having said similar things in the past. What should seem very strange is that Mr. Bourne and others do not appear to view this as a cause for concern.

It is a concern because Keynesian economics is taught to pretty well every student who ever studies economics anywhere in the world, and usually not as just one competing theory among many but as how the world works. Nor is it the case that academic macroeconomists are hopeless divided over the issue: a large majority on both sides of the Atlantic agree that fiscal austerity/stimulus reduces/enhances growth when monetary policy cannot offset its impact. Most major central banks use Keynesian theory as a basis for their monetary policy decisions. The reason for all this is that the evidence overwhelmingly backs Keynesian ideas, including that fiscal contraction tends to reduce output.

Given all this, if all three major UK political parties are ignoring Keynesian economics that would be a real worry. Now this might not worry Mr. Bourne if he was just one of these politicos for whom politics creates its own truth and that is all that matters. However he is in fact head of public policy at an outfit called the Institute of Economic Affairs. Perhaps, given the level of debate about fiscal policy in the media nowadays, that would be economic affairs of the more homely kind.


  1. There was a time when certain people looked through the telescope made by and used by Galileo and said to him that there were no moons around Jupiter as he believed he saw, rather it was a flaw in Galileo's own lens.

    At least they had the decency to go for unselfaware denial.

  2. The idea of a policy set (Keynesian or otherwise) "losing the political argument" or "losing the political debate" needs to be unwound, specifically the meaning of the words "political debate".

    Obviously in the case of austerity in the UK it is not as if a popular consensus gradually arose as to the necessity of austerity and that drove political parties to reject a Keynesian approach to the post GFC economic crises and adopt austerity. There was no big debate, no competing arguments and theories, no big conversations. The intellectual climate changed only in that voices that were pro-austerity were broadcast more and therefore heard more.

    Instead austerity and ideas of shrinking the state began to dominate elite discourse in the UK and much of continental Europe and that resulted in Keynesian solutions to the problems of the GFC and great recession not being offered to voters any more and duly being dismissed as politically impossible by the media (even where the media did not already just parrot the elite consensus).

    So the next time you read or hear the words "won the political argument" replace them with "dominates elite discourse" and see if that makes more sense.

    Class interests. Always.

    1. Pretty much spot on.

      Though we should separate 'elite discourse' from 'academic discourse' as the former is at complete odds with the latter.

      Kudos to Simon for engaging with, and exposing these clowns. City AM and the "Institute for Economic Affairs" (for which read mouthpiece for the overpaid) really do, very transparently, exhibit the worst of UK media. And that is saying something.

  3. As an LSE man from the 50's when Keynes was hot stuff and Welfare Economics given the boot I married a Home Economist. I am bound to say that her keeping of accounts has been infinitely more reliable and useful than any of the fulminations of many of the leading economists I have been urged to admire in later decades. Running the real numbers that are reliable and adjusting for uncertainty and potential adverse events seem to be a lost art these days.

    1. Yes. If we ran our households as politicians ran our country we'd soon be bankrupt.

    2. Isn't politicians trying to run an economy like a household what caused the austerity and slow recovery? 'If you are in debt, you have to quit spending!' True for a family budget but not the recommended course of treatment for this recession.

  4. A telling contribution from Bourne. It speaks volumes about the IEA. Never mind the economic fundamentals, what matters is the political argument.

    That is a perfectly respectable and grown-up stance to take. But it's one that would be better suited to an organisation that called itself the Institute of Political Affairs.

    1. Respectable? No, it's a stupid position. If he understands anything about economics, he should be sweating and be frightened. If a bunch of scumbags can waltz in with nonsense and get away with it, I don't give much of a chance to our societies.

      There MUST be a hefty price attached to dogmatic clinging -- and people like journalists or, in fact, anyone with a voice heard publixly should make sure every single person who's moronic enough to sell their reputation is going to regret it.

  5. "It is a concern because Keynesian economics is taught to pretty well every student who ever studies economics anywhere in the world, and usually not as just one competing theory among many but as how the world works."

    Is it? Well certainly rational expectations, Ricardian equivalence, RBC, Calvo Pricing, equity-efficiency tradeoffs and Edgeworth boxes are.

    If you want to get the right policies from government you need to convince society. To do that you need more convincing theory to support your argument. That will involve stripping the subject of nonsense - which is a fair whack of it.

  6. If you read the article it simply points out that the approach Simon has advocated does not find favour with any of the main political parties in the UK as evidenced by their manifestos and public statements.

    There is also a degree of noise about the merits of SWL and PK and Simon's response above is hardly dispassionate.

    The important point is the main one

  7. It all makes perfect sense, to anyone who has read Marx.


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