Beyond Keynes and Hayek
Robert Skidelsky and Meghnad Desai
| Friday, October 29, 2010
We must be in a jittery state for a slowdown in the rate of growth to be hailed as a triumph of recovery. The fact is no firm momentum of recovery exists. Take your pick of the forecasts. We might manage 1.8% this year at best, 1.6% next year. The comprehensive spending review has laid down a path for real-terms cuts in public spending over the four years to 2014-15 and the elimination of deficit over the same period. The capital budget is projected to decline by 46% in real terms. The government is hoping that deficit reduction will by itself "crowd in" private investment that is not there right now. In the meantime we expect the Bank of England to do some more quantitative easing, keeping short run interest rates low.
Many are urging a Keynesian boost to deficit spending to revive the economy and/or avoid double-dip recession. We assume that this is unlikely either because experience shows that the multipliers are low and the government believes the markets have no appetite for a big deficit-spending financed fiscal reflation; or because the government thinks the present crisis is not a Keynesian one induced by insufficient demand, and hence a fiscal boost could be counter-productive.
It would also seem that quantitative easing has not had a stimulating effect on the economy. Wherever the money has gone, it is not into the real economy. A similar situation prevails in the US where, as Alan Greenspan pointed out in the Financial Times of 6 October, corporates are using the money supply to buy liquid assets rather than "real" investments.
Consumers are also not spending but saving to deleverage, and even so consumer indebtedness is still dire. Much more deleveraging will have to be done before the negative wealth effect will vanish and spending resume.
This is very much what Hayek's theory leads one to expect. The crisis, he says, occurs because there has been a long run of cheap credit resulting in malinvestments, like today's sub-prime mortgages. Expectations of lending banks change, we have a reversal of cheap credit and the boom collapses.
Hayek's account of crisis origins can be made consistent with Keynes's if one takes the world economy as a whole. For Keynes the crisis is caused by an excess of saving over investment. A contemporary Keynesian would say that one part of the world, led by China, earns more than it spends, and another part, notably the US, spends more than it earns. Cheap credit in the west was the "correct" response to the flood of saving from the east. But because there were insufficient outlets for "real" investment in countries like the US that already had abundant capital, cheap money led exactly to a Hayekian crisis: a credit boom leading to malinvestments that ended in bust.
The essential point is that both Hayekians and Keynesians believe that once the economy has collapsed, recovery takes a long time. Hayek believed that recovery from the crisis caused by over-consumption and under-saving has to run its course, and cannot be speeded up by a Keynesian fiscal or monetary stimulus. It requires time before consumers recover from their undersaving and business gains confidence that profitability has been restored. Keynesians believe that, once aggregate demand has subsided, a fiscal and monetary boost is the only way to get the economy growing again.
If we don't want to wait for Hayekian "natural forces", but at the same time recognise that orthodox Keynesian fiscal policy and monetary stimulus (if it works) will only recreate the old unsound structure of production, is there a way of speeding up recovery?
Two unorthodox policy moves to revive the economy are worth considering. First, in order to make consumers spend rather than save we could adopt Silvio Gesell's idea of stamped money. This money loses purchasing power if not spent immediately. The easiest way to put money in consumers' pockets would be to give them a shopping voucher valid for one month after issue.
Second, a recovery loan that will mop up money in banks, firms and households for which there is no present use – and use it for infrastructure projects: the high-speed rail link, road building and repairs, and house construction by local authorities; or projects to do with carbon emissions - insulating houses, and solar panels. A company could be set up to raise money for these projects that would not add to the deficit.
The idea is to do things that would boost spending immediately, with the aim of reviving private investment by changing business expectations.
We can agree on the need for a recovery programme, even if we disagree about the origins of the crisis. The economist Lionel Robbins accepted Hayek's view of the Great Depression's origins but came to believe in the Keynesian remedy. As he said, you don't deny a drunk who's fallen into an icy pond blankets and stimulants on the ground that his original trouble was overheating.