John Maynard Keynes was no socialist. He had seen Soviet communism at work first hand and, unlike some of his contemporaries, drew the right conclusions. In common with Joseph Schumpeter — one of his many intellectual sparring partners — Keynes wished to save capitalism from itself. Schumpeter was a greater believer than Keynes in the so-called “creative destruction” of capitalism but, interestingly, more gloomy about its future.
For decades after World War II, what were loosely termed “Keynesian” economic policies reigned supreme. These involved reasonably enlightened attempts to tame the excesses of the business cycle (to mitigate the harmful effects of boom and bust, not necessarily to eliminate them) and a serious effort at international cooperation, always under the aegis of the strongest economy by far: the US.
It was never the golden age it is sometimes painted as being, but it certainly had a lot of silver linings. Even when Keynesianism ran into trouble in the 1970s — could it cure inflation? Was it even the cause of inflation? — there were others, including neo-liberal and monetarists, who believed they knew the answers.
But the present world economic crisis has come as a shock. Even those who predicted that it would all end in tears did not appreciate how many buckets would be needed for those tears.
GLOOM
Now, before I embarked on this column, my eldest son Harry rang me to say he was fed up with reading about all the gloom and wanted something constructive. I like to think that this was not a personal attack, but I am conscious that in trying to tell it as it is, I am open to such accusations. But let me also tell you that I have received several extremely gloomy letters recently from people I respect, reminding me that a return to full employment after the Great Depression was not brought about by a conversion to full-blooded Keynesian policies but by World War II.
But the war also brought us the welfare state and the 1944 Bretton Woods conference, leading to the IMF, the World Bank, the General Agreement on Tariffs and Trade (now the WTO) and a body to implement the Marshall Plan for the reconstruction of Europe. This body evolved into the Organization for Economic Cooperation and Development.
Such institutions have taken a back seat during the recent decades of obeisance to the wisdom of financial markets, but they will have to come to the forefront as part of any constructive solution to the present crisis.
And it is no good trying to underplay this crisis. As European Central Bank (ECB) President Jean-Claude Trichet recently said: “The idea was very, very consistently projected that the IMF would not have to help emerging countries any more” because financial markets would take care of any crisis. Now, he added, this had been proved “totally false.”
The world has now woken up to the fact that financial markets are very adept at causing crises, or at least contributing to them. Between January last year and January this year the exports of Japan — that quintessential exporting country — fell by 46 percent. The cause was partly the impact on Japan’s competitiveness of an absurd overvaluation of the yen by the financial markets and partly the worldwide collapse in the demand for traded goods.
Just to ram home how serious the collapse has been, former US Federal Reserve chairman Paul Volcker (recently recalled to help with the US economic recovery plan), was reported to be suggesting that the global economy might now be deteriorating at an even faster rate than during the Great Depression.
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