“The decadent international but individualistic capitalism in the hands of which we found ourselves after the war is not a success. It is not intelligent. It is not beautiful. It is not just. It is not virtuous. And it doesn’t deliver the goods.” – Keynes
Now I’m no economist, I did geography at university, but I was recently in a basic economics lecture and the lecturer’s approach was troubling to me. Principally it was his assertion that monetarism had won the 20th Century economic debate by miles, with his only qualification being some complex maths. Now this view contrasted with my own studies so I’d thought I’d do some research.
In economic geography we refer to mainstream economics as “political economy” and there are three main accounts of political economy: Keynesianism, Monetarism and Marxism. I’m going to discuss Keynesianism and Monetarism.
To ascertain who won we must look at what each school believes. Keynesianism dominated Western economies from the end of World War 2 till the late 70s. It’s central tenets were that capitalist economies are prone to boom, bust and crisis, and they tend towards overaccumulation. To mitigate the inherent instability of a capitalist economy there should be strong state intervention, known as “fiscal activism” whereby the state hoards money in times of boom, to spend on infrastructure in times of crisis, with the ultimate goal being “full employment” for the population. Keynes also believed in tough regulation, as left unchecked businesses and intermediaries (such as banks) would engineer a crisis. He equated stock markets to casinos where those with better resources and information such as corporations or banks have an advantage over ordinary people, and for that reason, the general public should be protected from the stock market to avoid mass speculation like that which led to the 1929 Wall Street Crash. Keynesianism also advocates a welfare state to try to even the inequalities created by capitalism. Crucially it states inflation is not as important as fiscal activism, as the “Phillips Curve” showed that decreasing unemployment caused high inflation.
It was this curve that led to the downfall of Keynesianism in the late 1970s. The curve was firmly discredited by the stagflation crisis which saw high unemployment and high inflation in much of the western world, which shouldn’t of been possible if the Phillips Curve was correct. Monetarists argued this meant Keynesianism didn’t work, actually this crisis was likely due to the fact that governments didn’t adhere to Keynesianism properly as spending cuts and tax rises are detrimental politically, instead they just kept spending especially pre-election. It was in this time of crisis that the monetarists emerged from the shadow of irrelevance they’d occupied since the 1930s to try establish their doctrine as mainstream.
Monetarism is neo-liberal, free market economics, it argues that the state should play as little a role in the economy as markets, are perfect and self-correcting. In practice this means deregulation and the roll back of the welfare state, as well as the encouraging of all actors to take part in markets, to create a “shareholder democracy” where everyone is financially independent of the state. In terms of this debate, perhaps the most important postulate of monetarism is that controlling inflation is the essential to a stable economy, not fiscal activism, as Keynes advocated. Monetarism was first applied in Chile after an American-backed coup ousted the incumbent socialist government and replaced with right wing dictator Pinochet. The new government then implemented the policies of key neoliberal theorist Milton Friedman, with questionable success, however with the elections of Thatcher in the UK and Reagan in the US, monetarism replaced Keynesianism as the political economy of choice in the late 1970s.
Now you may be thinking well if monetarism became hegemonic and Keynesianism was discredited and died away, my lecturer was right and monetarism did win “hands down”, well, no. The 2008-09 crisis was the most severe financial crisis since the Great Depression, this came after almost 30 years of neoliberal policies (including the proclamation of the end of boom and bust in the period now referred to as the Great Complacence) and was undoubtedly a crisis of neoliberalism, the low interest rates (supposedly controlling inflation), encouraged a era of cheap credit, where everyone from ordinary consumers to the biggest banks borrowed like never before, the banks loaded their balance sheets with complex financial products tied to extremely dodgy mortgages, aided by the light-touch regulatory regimes established by neoliberal leaders meaning when the housing market crashed, the economy blew up. Controlling inflation hadn’t prevented the crisis, light-touch regulation had failed and because more people were exposed to markets than ever before, it affected the real economy more severely than ever before. To combat the crisis the US and UK governments resorted to Keynesian policies, they bailed out the banks and they pumped new money into the economy.
The crisis showed that Keynes was right about boom and bust, he was right about regulation, right about protecting the public (who ended up bailing out reckless, failed banks) and right about the cause of crises. Therefore Keynes didn’t really lose the debate. Yes monetarism became ascendant but that was because of a series of political coincidences, accidents and tides (Pinochet, Thatcher, Reagan), as well of the failure of Keynesian thinkers to adapt and reform the system in the aftermath of the stagflation crisis.
Fast forward to 2016, neoliberal thinking is still ascendant, despite the crisis which is testament to its strength, but maybe it is a lack of perspective from economists such as my lecturer why this is the case. I propose two things: 1) what if an independent body, was charged with implementing Keynesian policy, pumping and hoarding money when necessary, this removes the temptation of governments to print money when their economy’s lagging, and builds on the existing independent status of many central banks that are charged with controlling inflation; 2) that we move away from viewing political economy regimes so narrowly, there are far more factors that affect both systems than questions of inflation or unemployment, social issues, geographical inequalities, long-term processes or political legislation for example, economists should move away from their pure-science model to one that is holistic and all-encompassing, if they are to become better at preventing crises.
Who won the debate? Well the way the economy is today, it’s still ongoing.