Keynesianism and the crisis of modern economics
- By Michael Roberts and Heiko Khoo
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E-mail China.org.cn, January 30, 2017
In 2008, Britain's Queen Elizabeth, speaking at the London School of Economics, asked some eminent economists why they'd failed to foresee the economic crisis then unfolding? They could not explain the reason! The impotence of mainstream economics continues today.
Lord Robert Skidelsky is the award-winning author of an acclaimed three-volume biography of John Maynard Keynes. He believes that mainstream economics remains in a deep intellectual crisis.
He writes: "Let's be honest: no one knows what is happening in the world economy today. Recovery from the collapse of 2008 has been unexpectedly slow. Are we on the road to [regaining] full health or mired in 'secular stagnation?' Is globalization coming or going?"
He continues: "Policymakers don't know what to do. They press the usual (and unusual) levers and nothing happens. Quantitative easing was supposed to bring inflation 'back on target.' It didn't. Fiscal contraction was supposed to restore confidence. It didn't."
For Skidelsky, a big part of the problem with mainstream economics comes from its use of unrealistic models and mathematical formulae that fail to grasp the "whole picture." As a consequence, mainstream economics lacks a "common understanding of how things work, or should work."
He blames this on a tendency to view society as a machine designed to achieve an equilibrium of supply and demand, in which "deviations from equilibrium are 'frictions' or mere 'bumps in the road;' barring them, outcomes are pre-determined and optimal."
However, human behavior does not fit this mechanical equilibrium model of economics, because it takes no account of human unpredictability and change. Skidelsky blames this on the lack of a "broad education and outlook" among economists, who need to understand wider features of social organization and behavior and locate them within the context of broad historical development.
However, Skidelsky's arguments do not really explain why mainstream economics became divorced from reality. This is an automatic and deliberate consequence of avoiding questioning the system of capitalism itself. The great classical economists of the 18th and 19th centuries - Adam Smith, David Ricardo, James Stuart Mill etc. - developed "political economy" as an "objective" analysis of the economic system. However, as the capitalist form of labor exploitation became dominant, mainstream economics became transformed from an objective tool of analysis into an apologia for capitalism.
It is certainly true that mainstream economics is narrowly mathematical and is focused on economic models. However, there is nothing inherently wrong with using maths and models. The problem lies elsewhere - in the fact that economics no longer seeks to present an objective analysis of the laws of motion of capitalism.
Rather, economists perform like a choir singing hymns designed of praise -celebrating, justifying and protecting capitalism. Their assumption is that capitalism is the only viable system of human social organization.
They maintain only capitalism can meet people's needs. There is no alternative. The capitalist system works just fine if it's left alone. However, too often, outside forces like governments and "rent-seeking" monopolies interfere in markets. So, all that is required from government is to contain occasional "shocks" and correct "technical problem" that may arise in production and circulation.
However, Paul Krugman, the world's most prominent Keynesian economist, disagrees with Skidelsky. He disputes the claim that mainstream economics regarded deliberate fiscal contraction (austerity) as necessary to "restore confidence" after the Great Recession.
Indeed, Krugman says the Keynesian wing of mainstream economics argues the opposite: that greater government spending would have countered the economic depression. He says austerity is "strongly correlated with economic downturn." However, the evidence for this is weak. For example, the three main Keynesian solutions - easy money, zero interest rates and fiscal expansion - have all been tried and failed in Japan.
Krugman blames policymakers because they "refused to use fiscal policy to promote jobs; they chose to believe in the 'confidence fairy' to justify attacks on the welfare state, because that's what they wanted to do.
"And yes, some economists gave them cover. But that's a very different story from the claim that economics failed to offer useful guidance. On the contrary, it offered extremely useful guidance, which policymakers, for political reasons, chose to ignore."
It is true that policy makers may have chosen to ignore the option of fiscal spending in order to solve the "technical problem" of the Long Depression. And this was partly "for political reasons." However, these "political reasons" are rooted in the existing social and class structure, and the power that big business wields over politics and political ideology.
Even so, regardless of the enormous lobbying power of capitalists, increased government spending and bigger budget deficits will not produce an economic recovery if the profitability of capital is low. This is because profits are the driving force behind capitalist investment.
Low profits cause low investment. Therefore, the economic problems we face today are endemic to the capitalist system. The future of economics belongs to those who seek to replace it.
Heiko Khoo is a columnist with China.org.cn. For more information please visit:http://china.org.cn/opinion/heikokhoo.htm
Michael Roberts is a London based Marxist economist. He published the "The Great Recession" in 2008 and "Essays on Inequality" in 2014
Opinion articles reflect the views of their authors, not necessarily those of China.org.cn
