Posts Tagged ‘Keynes’

Milton Friedman on the Ignorance of Economists

March 5, 2016

Economic Fortune Telling Cartoon

Cartoon from Private Eye for the 5th-18th September 2008. The caption reads ‘I also read palms’.

I found this confession by Milton Friedman that economists simply don’t know enough to make effective decisions on economic problems in Peter Clarke’s piece, ‘The Keynsian Consensus and Its Enemies in: The Arguments over Macroeconomic Policy in Britain since the Second World’ in David Marquand’s and Anthony Seldon’s The Ideas that Shaped Post-War Britain (London: Fontana 1996), published by the New Statesman.

We simply do not know enough to be able to recognise minor disturbances when they occur or to be able to predict either what their effects will be with any precision or what monetary policy is required to offset their effects. We do not know enough to be able to achieve stated objectives by delicate, or even fairly coarse, changes in the mix of monetary and fiscal policy. (p. 86).

This follows the book’s general line that Keynsianism has fallen and is discredited. See Clarke’s previous chapter in the book, ‘The Keynesian Consensus and its Enemies: The Argument over Macroeconomic Policy in Britain since the Second World War’. I’m not convinced. I’ve been told by friends of mine that Thatcher was forced to abandon her precious Monetarism and go back to Keynsianism because, put simply, Monetarism wasn’t working. And neither have much of the British workforce since Thatcher took power, largely because of Friedman’s and Hayek’s ideas. I can also remember the Daily Mail splashing over one of its pages the announcement by Friedman that he was absolutely wrong. And then, of course, devoting another half-page to someone trying to argue that he was right.

And even when Monetarism was in fashion, not everyone was convinced of its effectiveness. The book, Keynsianism and After is an effect reformulation and defence of Keynes’ economic insights. In my view, that comment from Friedman may be a frank admission that economists and politicians can’t plan the economy, as asserted by Tory Libertarians, but more importantly, it’s an admission from one of the key free market thinkers that he didn’t have answers either. He didn’t. But the country’s still suffering from politicians, who believe he did.

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Jess on Say’s Law and the Tory Denial that Increase in Food Banks Represents Genuine Demand

April 20, 2014

Jess, one of the commenters on this blog has posted a detailed critique of the economic law behind the Tories’ refusal to admit that the rise in food banks is due to a massive increase in poverty. The Tories cannot admit that there is mass starvation in this country due to their austerity campaign. They therefore claim instead that food banks are increasing simply because there are more food banks, and their mere existence attracts more customers.

In her comment to Mike’s post on Vox Political, ‘Food bank blow is new low for the Mail on Sunday’, Jess attacks this assertion, and shows that it is based on Say’s Law, an economic doctrine that has now been comprehensively refuted in the form it has been adopted under Lord Freud to justify the attacks food banks. She states

“Another claim – that “volunteers revealed that increased awareness of food banks is driving a rise in their use” is unsubstantiated, and is clearly an attempt to support the government’s claim that this is the case. But it is silly. Of course starving people will go to a food bank after they have been told it exists; that doesn’t mean they aren’t starving.”

The DWP appear to be pushing this line rather hard, as their response to the public’s growing awareness of the scandal of food banks. Their argument, based on Say’s Law, is utterly fallacious, and they must know it is.

Say’s Law, roughly formulated, is “”Supply creates its own demand”[http://en.wikipedia.org/wiki/Supply_creates_its_own_demand].
In the present context it seems to have been first invoked by Lord Freud, and then taken up by his department.

It will be familiar to most people through its mention by Keynes in his ‘General Theory’;
“From the time of Say and Ricardo the classical economists have taught that supply creates its own demand; meaning by this in some significant, but not clearly defined, sense that the whole of the costs of production must necessarily be spent in the aggregate, directly or indirectly, on purchasing the product.” [http://www.marxists.org/reference/subject/economics/keynes/general-theory/ch02.htm]

But even the free marketeers regard Freud’s interpretation of Say as ridiculous;
“W. H. Hutt once referred to Say’s Law as the most fundamental ‘economic law’ in all economic theory. In its crude and colloquial form, Say’s Law is frequently understood as supply creates its own demand, as if the simple act of supplying some good or service on the market was sufficient to call forth demand for that product. It is certainly true that producers can undertake expenses, such as advertising, to persuade people to purchase a good they have already chosen to supply, but that is not the same thing as saying that an act of supply necessarily creates demand for the good in question. This understanding of the law is obviously nonsensical as numerous business and product failures can attest to. If Say’s Law were true in this colloquial sense, then we could all get very rich just by producing whatever we wanted.” [http://www.fee.org/the_freeman/detail/understanding-says-law-of-markets]

How then, did this silly ‘aphorism’ creep into the language of the DWP?

One route may have been through the IEA and it’s then Director David G Green.. He wrote a couple of pamphlets in the late ’90′s advocating the demolition of Social Security, and a return to the Friendly Societies of Victorian England [Benefit dependency : how welfare undermines dependency.1998; An end to welfare rights : the rediscovery of independence 1999]

Most people, at the time, thought Green was ‘off his trolley’, It is tragic that Say, and Green is being used to attack food banks. The last refuge of the destitute.

This last paragraph, where she mentions IEA and its director, David G Green, is also important. I remember back in the 1990s the Daily Mail criticising the establishment of the modern welfare state for the way it sidelined the Friendly Societies. The Daily Mail had clearly been influenced by Green’s bonkers views, and it shows just how extreme and reactionary the Mail is.

Back to 1920s Economic Orthodoxy with Neo-Liberal New Labour

March 24, 2014

140323labourpolls

Poll showing the fall in Labour’s lead over the Tories after Balls and Milliband declared they would not opposte the government’s austerity campaign.

Yesterday Mike over at Vox Political put up a controversial piece about the way Labour’s lead over the Tories had collapsed in the wake of Osborne’s budget. Mike argued that this was because Ed Balls and Ed Milliband, instead of defending the working and lower middle classes – the genuinely hard-working people of Cameron’s Britain – against the privatisation of the health service and savage cuts to benefits – Balls and Milliband had instead largely agreed with the government’s policies. To the disgust of many, Milliband has stated that he will not reverse the government’s austerity cuts despite the fact that these are economically nonsensical. Like his predecessor, Tony Blair, Milliband has stated that he wants the party to reach out to the middle class. Thus he appears to have abandoned the very people Labour was founded to represent – the poor, and the working class.

When Blair launched the New Labour project it was proudly held up as modernising the party, a policy and attitude that Milliband wishes to follow. Except that it hasn’t modernised the party. It’s done the opposite and dragged it back over 90 years to the 1920s. When the Labour formed its first government in that decade, contrary to expectations and the desires of its rank and file members and voters it followed a policy of model economic orthodoxy with fiscal restraint in order to pay for the War one of the government’s chief priorities. This was the same decade that Keyne’s produced his ground-breaking theories that overturned classical economics and argued that government spending would indeed create economic growth rather than the opposite. However, with the exception of Lloyd George, the parties across the political spectrum failed to adopt them and remained firmly wedded to classical liberal orthodoxy.

Despite the party’s formal commitment to socialism and the working class, there appears to have always been a reluctance amongst some members of its leadership to break with received economic wisdom and appearing too radical. Some of this may be due to the electorally weak position the Labour party has often found itself in. In the mid-1970s under Callaghan the party had a majority in parliament of five. Some of this may also simply be due to the ideological inertia of society as a whole. Once in power, Labour may feel powerless to challenge the entrenched economic and social views of wider society, including the Civil Service and the Bank of England.

It must also be admitted that there are sections of the Labour party, which also seems to share the views of their opponents across the floor, both in economics and in their attitude to the working class. One of the criticisms levelled at the new generation of Labour MPs in the 1970s was that they were largely drawn from the middle classes, and feared and distrusted the working classes on whose behalf they had been elected. This attitude became acute with New Labour, when Tony Blair adopted post-Thatcherite economic and social policies in order to win over the swing voters in key constituencies at the expense of their traditional working class electoral base. As New Labour proudly declared at the time, ‘we’re all middle class now’. Except that we weren’t, and the working class and the poor suffered as a result. Some of that attitude was due to desperation. One female Labour politician in Owen Jones’ book, Chavs: The Demonization of the Working Class states that they turned to the new, post-Thatcherite political orthodoxy simply to get into power, so that they could at last do something. It worked, but once in power New Labour forced through many of the same policies that Cameron is pursuing now, which are causing so much damage and harm to Britain’s ordinary, working people.

In the case of New Labour, there is also an ideological influence from American Conservativism. Reagan launched a project to influence the next generation of politicians over here in order to create an Atlanticist alliance and political consensus. This was the British American Project for the Successor Generation, or BAP. The individuals who participated ended up going on various courses in Washington, to meet the people at the heart of the American political system and to see elements of it adopted on this side of the Atlantic. BAP not only included British Conservatives, but also aspiring opposition politicians, including Blair, Balls and the rest of New Labour. The British parapolitical magazine, Lobster, has devoted a number of articles to this.

The result is the current Labour leadership, which seems desperate to follow whatever the Conservatives are doing at the moment, no matter how wicked or harmful, in order not to offend the middle classes. Not only is this a nasty, short-sighted policy that hurts the very people Labour was formed to represent, it’s also unnecessary. The number of people voting in elections is shrinking, partly because people don’t see any real difference between the parties, who are all competing for the same narrow demographic base. Labour could overturn this simply by returning its original Left-wing political orientation. The public does not want the privatisation of the health service and most would like to see the railways and the utilities renationalised. Simply appealing to those voters could massively increase Labour’s lead over the Tories.

At the same time, Labour has never been against the middle class. One of the founding organisations of the modern Labour party, the Fabian Society, explicitly rejected class warfare. They felt that socialism would benefit the whole of society, and so set about trying to win over the middle class support, which they felt was necessary for the successful implementation of socialism. Note: they wanted to win the middle classes over to socialism, not simply win middle class support at the price of jettisoning it. In fact the Fabian Society and the Labour party have often been accused of abandoning Socialism in order to gain the support of the middle classes, but even so, they did have a profound belief in Socialism, even if this was not always reflected in practice. The Labour MP Tony Crossland believed that Labour’s welfare policies actually benefitted capitalism, as it allowed the workers to purchase more goods and services, while government intervention in the economy meant that businesses were protected from the massive slumps and bankruptcies that occurred in the 19th century.

In many ways the Labour party has been far more pro-business than the Tories, even before Blair arranged for the party’s commitment to nationalisation to be dropped from its charter. The Labour administrations of the 1970s made grants available to businesses so that they could modernise their plants, and attempted to pursue policies that would allow businesses to compete in the international market. Compare that to Thatcher, under whose administration failing businesses were ruthlessly closed and millions were thrown out of work.

Economically and socially, Thatcherism and Neo-Liberalism are abysmal failures. They succeed politically because they benefit an immensely wealthy few, and appeal to some of the worst aspects of human nature – greed, insecurity and a vindictive, visceral hatred of the less fortunate.

The Neo-Liberal consensus it not shared by a large majority of the population. Labour can still win elections with a more Socialist political agenda – by strengthening the welfare state and providing better planning and support for businesses. All it needs is the political will from its leaders to do so. If Balls and Milliband don’t do this, then Labour will certainly lose the next election and the British people will suffer poverty and deprivation on the level of the Great Depression. Balls and Milliband have a choice. They can either return Labour to its Left-wing roots, or they should give up the leadership to someone who can.