To note the the 83rd anniversary of the publication of Keynes's "General Theory " a leader in yesterday's Guardian gave this expanded definition of Keynesianism:
- a state-guided investment policy
- a generous social welfare system
- progressive taxes
- a low interest rate
- monetary policy run by a nationalised Bank of England
- strict capital controls
- managed trade
- non-casino financial markets.
The article claims that Keynesianism was abandoned because the Tories felt that generous welfare spending undermined capitalism. I'm not so sure about this. In my view Keynesianism fell into disrepute not because of any flaws in the theory, but because its use was abused.
The theory was and is that the government should moderate the effects of the trade cycle by deficit spending to avert a downswing (leading to stagnation and higher unemployment) but take demand out of the economy (by raising taxes of cutting expenditure, or both ) to moderate the inflationary effects of an upswing.
Unfortunately govermnets quickly learnt to use the policy, not so much to control the trade cycle, but rather the election cycle. Bursts of expenditure were engineered to create a feel-good factor as an election approached, and then another one a just in time for the next election. The "pay back" bit tended to be forgotten. This led to absurdly high rates of inflation in the 1970s.
Keynesianism was replaced as the predominate orthodoxy by neo-liberal monetarism, growth was stifled has been virtually non-existent since 2008. Unemployment has remained high (don't be fooled by the Thatcher revisions of the method of calculating it, and the present precarity of those on zero-hours contracts, part-time workers who want to be full-time, and the involuntary self-employed, whose existence makes the crude figures look attractive)
The irony is that, if the Johnson government turns out to be as prolific as its utterances pretend (and the forced "amalgamation of No 11 with No 10 indicates that that is on the cards) then this Tory government could bring about the revival that most macro-economists (and this humble blog) have been calling for since 2010.