This week, our Toff Bullingdon boy chancellor seems to have finally thrown in the towel and admitted that his deficit targets will be missed. I seem to recall pointing this out well over a year ago. Having steering the country into back into recession, it seems the Tories are aiming for a nice big lamp post to wrap the economy around. Some market watchers are already talking of the possibility of a triple dip recession. Speculation is also now mounting that with the UK’s debt levels rising, the country will loose its cherished triple A credit rating. Of course the irony is, that one of the main justifications for the austerity measures was the need for the UK to maintain its triple A credit rating!
And its not exactly rocket science why the government is in this mess. Keynesian economics tell us that the worse thing a government can do in a recession is cut public funding. This causes everyone else in the economy to slam on the brakes and stop spending. Small businesses worried about lots of unemployed civil servants no longer frequenting their premises doesn’t try to expand, even if he sees a market for such expansion. Even if he does, the Bank worried about more mortgage foreclosures stops lending to small businesses. Employers stop hiring, even to replace retiring staff. All in all the whole economy slows down, tax receipts fall and the government suddenly has to borrow more, not less. It is this very debt spiral that has brought eurozone countries such as Greece and Ireland too their knees and it is largely the fault of right-wing zealots such as Osborne on Merkel who are at fault for this crisis.
Steffen Flanders on the Beeb had an interesting TV series out a few weeks back called Masters of Money. The Open University has a page here that talks about it, and the different economic theories involved. At its heart is a debate between, J. M. Keynes (who advocated a more controlled economy), Heyek (who said politicians should just get out of the way) and Karl Marx (who said bolix to this, capitalism is unstable and institutionally corrupt and should be got rid of altogether).
All in all, I would argue that all three of these great economic theorists were correct but in different ways, but also wrong to some extent. If anyone has been more correct about the performance of capitalism (in particular the events of the last 5 years, it is Karl Marx. Look no further than the greed and corruption of Wall Street (or as I mentioned in my last post, Fleet Street) for an example. However the flaw in Marxist theory has been coming up with an alternative to Capitalism. For those unfamiliar with 20th century history, that sort of didn’t work out so well!
Heyek, similarly is probably correct, in that the best thing the state should do is leave people alone to run their businesses. But! This assumes we live in an ideal world, and the bad news for Heyek’s many right wing supporters is that we don’t. For the Austrian school of economics to work it requires our corporations to be run by people who will be cut throat Gordon Gecko’s one minute, then turn into buddish monks the next (and put the the nation’s economic interests ahead of their own). As the numerous scandals have shown, not just recent years, but the the many others stretching back to the very early days of the capitalist era (the panic of 1873 being just one example), greed and corruption are all too prevalent in capitalism. Inevitably in the absence of regulation the very greedy and corrupt, those who are willing to take the biggest risks and tell the most outrageous lies (notably the office psychos who control many of the world’s largest companies) will win….but when they get it wrong or succeed in creating an unsustainable bubble, the consequences for the wider economy will always be catastrophic…usually forcing the taxpayer to ride in and restore order.
It was for these reasons that Keynesian economics became dominant in the post 1930’s depression. And the period from the 1940’s to the 1970’s represents one of the longest and steadiest periods of economic growth in history. It was only the economic crises of the 1970’s that caused some to doubt Keynesian theory. Personally I would pin the blame on this on the oil crisis of the era which resulted in inflation soaring at a time of recession. Richard Heinberg of the Post Carbon institute discusses this matter, and the similar problems we are having right now, in this short film. But either way, the events of the 1970’s led to the rise of free-market evangelicals such as The Thatcher or Ronald McReagan.
Of course, we’ve now gone full circle, the dismantling of the Bretton Woods system has led to a collapse of the world economy on a parallel with the 1930’s depression (indeed it is worth remembering that what made that depression great wasn’t the wall street crash but the fact that the global economy remained in a state of decline for well on a decade…which is pretty much what’s happening now!). Clearly Keynes was correct, the government needs to keep a firm hand on the tiller and carefully regulate the economy. Nations do need to be prudent with their cash, yes. But equally they need to keep those savings for a rainy day, and the news to Osborne is its currently pouring outside.
But the zealots of the free market cargo cult, such as those in the Tory party, do not give up their mantra easily. In many respects the rise of libertarianism within the US tea party movement can be seen as a sign of this. Its equivalent to the priests of the Mayan apocalypse calling for yet one more sacrifice to appease the gods. They’ve tried their best by kicking old grannies out of nursing homes, putting public sector workers on the dole queue, people with disabilities below the poverty line, cutting police officers, you name it, but it doesn’t seem to be working.
Obviously the message to the rest of us is, that we urgently need to stop Osborne or as he’ll go to the stage of sacrificing babies (or at the very least, closing down schools and hospitals) before admitting the inevitable truth.