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The Return of the Master

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Paul Mason | 21:56 UK time, Tuesday, 1 September 2009

To push against the crisis or let it rip; to borrow and spend or balance the books - these are questions that will shape the outcome of the financial crisis - and the next election.

Looming over the debate is the shadow of a 20th Century giant: John Maynard Keynes.

I've been reading Robert Skidelsky's new book "Keynes - The Return of the Master" and it's an eye-opener. Skidelsky's three volume biography of Keynes was a landmark of the last decade and his latest book takes a completely unexpected turn.

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Instead of a potted biography it is mainly a deep-Keynesian polemic against the freemarket economics that led up to this crisis, and the market-guided policy responses, and the failure of mainstream economics including the so-called New Keynesianism that emerged once the doctrine went mainstream in the 1960s.

It also contains a highly coherent account of the events of September-April, all the clearer for his decision to stop reading the newspapers while he was writing it. If you're doing Economics at GCSE or A-Level, this one chapter is a good reason to read the book.

We've got Lord Skidelsky on Newsnight tonight to discuss what Keynes might have done in this crisis; how he would have judged those who're using his tactics but still don't agree with his strategy and philosophy. He'll be facing one of his critics - my old opposite number and now venture capitalist Liam Halligan.

What is certain is that Keynes is back - in policy if not in philosophy. The quantitative easing strategy adopted here and in America was first advocated by Keynes in 1932; using the state spending to boost demand - well that's been done to a the tune of five trillion dollars worldwide. In the space of 12 months, all over the world, state rescued the market.

At the end of the 1920s economists believed capitalism was inherently stable; markets inherently efficient; recessions necessary. Then came the Depression: US GDP halved, the stock market lost 80% of its value; one if four of the workforce was unemployed.

Keynes concluded capitalism was unstable and needed state intervention to make it stable. Keynes went on not just to write a general theory of unstable capitalism, but to prescribe remedies that actually worked, and quickly.

Keynes was an economist who refused to believe that past data predicts the future; he based his theories on uncertainty and his prescriptions on morality. On the eve of last year's meltdown had almost no followers in Wall Street and few in academia. Mind you there are a few more now...

Comments

  • Comment number 1.

    ''Keynes was an economist who refused to believe that past data predicts the future; he based his theories on uncertainty and his prescriptions on morality''

    Sounds reasonable, but surely by his own logic we should NOT looking to the past (Keynes policies), we should be looking to apply his driving principles as described above to provide completely new policies fit for our particular times. I dont think we are at base one yet in terms of prescribing bespoke solutions based on morality as a driving force.

    What seems to be happening is that keyne's legacy is being hijacked by the spivs as a way to prop themselves up (QE being a good example of this) whilst allowing them to claim the ' grand social moral engineering card'.

    I am not being too cynical am I ?

  • Comment number 2.

    i agree with the above

  • Comment number 3.

    Laissez-faire / interventionist ; Keynesian / classical ; am I one of a few that sees these classifications as relics of past thinking. Counter-cyclical liberal democratic government fiscal and monetary boosts and price stability targeting were supposed to have engineered stability. Shape-shifters in hedge funds found ways to disguise risk and chase up yield with regulators left in the exhaust plumes. Deficits are being funded by the markets which themselves needed public life-support. Unemployment takes its usual toll. Safety-nets ( imperfect though they may be) catch those who fall. All credit to Keynes in his time, but the world moves on.

  • Comment number 4.

    We didn't see this either up here in Scotland ..... but I bought your book in Sheffield, Paul!

  • Comment number 5.

    Hope you manage to do something soon too on the rise of the Left in Japan. Perhaps a major interview with Marxist economist Makoto Itoh?

    http://en.wikipedia.org/wiki/Makoto_Itoh

  • Comment number 6.

    It is being suggested that current "monetary policy" follows Keynes' views and is foolish because growth will collapse when the monetary stimulus stops. But surely Keynes would argue that monetary policy cannot cure a recession? Pumping money out (QE) simply pushes us into the liquidity trap, where banks build up ever growing idle balances at low interest rates.

    The multiplier effect depends on an overall triple balance; government spending versus tax, consumption versus savings and exports versus imports. Unless the overall balance of G plus C plus E is the greater, the economy shrinks.
    Recovery will require a courageous attack on international finance capitalism, or any domestic stimulus dissipates overseas.

    At present Gordon Brown is relying on this anti-Keynesian monetarism, throwing our tax wealth into the black hole of bank capital-rebuilding which the banks use to line their own pockets while squeezing the life out of the rest of the economy to grab funds which they hope to use to get the government off their backs.
    Surely we need direct support for productive capital - redeveloping our coal industry, directing resources to unemployment black spots, cutting spending on long-term "soft" growth targets like education (why should we want to rival Cuba in a contest for the best edcated prostitutes in the world?), in short being prepared to re-establish the economic nationalism that led to the Industrial revolution in the first place;and breaking the hold of the ruthless cosmopolitans, the parasitic finance sector that has destroyed far more wealth than it ever created.
    For a start we could establish a Bank of National Reconstruction, and a Land Bank for agriculture; and re-establish the post office gyro as a money-transmission system free of user cost to replace our rate-skimming fat cats. Otherwise we will continue to impoverish ourselves building up failed banks that refuse to lend and are busy closing branches and sacking people and chasing profits from low-wage unskilled labour.

  • Comment number 7.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 8.

    I'll try again! Keynes has been co-opted as justification for perpetuating the "debt-based accumulation model". Time for another reminder from "Smith, Marx, Kondratieff and Keynes":

    http://www.southerndomains.com/SouthernBanks/p2.htm

    "the first two downswings were resolved by labor-based innovations from the private sector, while downswings three and four were resolved by the public sector.....within a Keynesian model of fiscal intervention by the federal government."

    Liam Halligan was right last night to point out the preposterous growth in the money supply:

    http://en.wikipedia.org/wiki/Money_supply

    Did we really get 3 times wealthier from 1990 to 2007?? No, what we have is hidden inflation and a postponed catastrophic collapse. Skidelsky was smugly saying that we have staved off a depression thanks to the Gvt policies. All the while failing to acknowledge that we overspent in the past, and worse still are compounding this by actually adopting a further debt-based expansionist policy for the future. A "buy now pay later" tactic with no clue whatsoever where the wealth to pay for this will come from.

    We are borrowing from the future for it is not around to protest about it!

  • Comment number 9.

    #6 Miss welham,

    I don't agree with all of it but it is the kind of radical thinking and policies that is now required.

    It is also the kind of thinking I think Keynes would have applied if he were given the modern situation to resolve rather than the situation in the 1930s.

    Keynes was the right man in the right place at the right time, we need the modern equivalent in our time to emerge, he said himself the past is no guide to the future in finance so we are hardly following keynsian advice by using his own past policies as a guide, quite the opposite!! A rather obvious conflict noboddy seems to have picked up on while enthusiastically proclaiming the return of Keynes!!

    Has the depression really been averted by the adoption of keynesian policies or, in the context of the modern situation has it simply had the effect of delaying the depression affording the chance for the spivs to make their escape, using the detail of keynes policies but not his guiding principles?

    What would keynes have done differently if he had 'peak oil' or increasingly as I am beginning to grasp 'peak energy, peak comodities' and 'peak population' to deal with?

    Humanity seems unable to change unless it feels pain, could it be that adopting these policies has simply delayed the pain and allowed the real underlying problems to go on unchecked, hence storing up even more pain than would have been the case if we had taken a different approach to this crisis from the beginning that looked at grasped and tackled head on the real underlying issues?

    I dont know the answers but surely these are the sort of questions leading journalists should be asking of our so called brightest and best. I have a poor grasp of grammer and spelling and never went to a fancy school or uni nor do I have any fancy friends or qualifications yet I can see more than these leveraged, careerists, masonginistic chumps in suits seem able to.


  • Comment number 10.

    The current fashion for Keynes will only last as long as required by the spivs in order to theoretically justify the taxpayer bail-out of their jobs and bonuses. As soon as 'business as usual' returns he'll be thrown overboard in preparation for another securitized debt-binge.

  • Comment number 11.

    The Book of Ecclesiates is a good text as it simply states that everything has it season. There is a time for Keynes and time for Hayek, Friedman and all the others. Their ideas were born from actual conditions that applied at certain times, yet times change so perhaps we need to be less rigid in our definitions.

    In my experience sometimes it serves to react to conditions and at other times it serves to ignore events or rather not to react to events. There is no golden rule. Times change and we have to change with it.

    What has facinated me throughout this crisis so far has been the role of dogma within the arguments. I found myself both agreeing and disagreeing with both Skidelsky and Halligan last night. However, we can all be agreed that there is a need to do something. Even if we do something wrong we will at least find that out in due course and change direction.

    What concerns me more than anything else is that there is no strategy to public policy which seems to be based on make do and hopefully mend some day. Apathy seems to have overwhelmed the government whilst conditions in the real economy only deteriorate.

    The simple truth is that nobody knows what to do. I do not see QE as a Keynsian measure. I see it as a monetarist measure to protect the banks. In that, it is working but it is not helping anyone else. It has to be part of a greater strategy which is just not in evidence. Its absence suggests to me that it is not there. We will not solve this thing piecemeal.

    Perhaps the economist that will finally sort this out has just passed his GCSEs.

  • Comment number 12.

    If the Master returned he wouldn't recognise the world.

    Entities we take for granted under such headings as Globalisation, OPEC, Climate Change, EU, Euro, Doha Round, Internet.........................make the system we call an economy whole new being.

    What makes you think his theories will work ?

  • Comment number 13.

    I am a Keynes man but maybe he was a man for that particular season and not for all seasons...Liam Halligan made me think of possible alternatives, his input on C4 News was always informative but to argue against Keynes is a big fight especially when you don't have time on your side. Politicians down the years have ended up going down the Maynard Keynes road...when all else failed, it could be that Liam is another one of these 'new thinkers' when the same old monetary rules still apply and take some shifting....good debate though...

  • Comment number 14.

    At least the debate is taken far from the simplistic monetarist MPC QE ideas of how modern economies are recovered and then managed rationally. In this context Brown Darling and Cameron can be seen as economic dinosaurs and it is not obvious who of these is the true Friedman Hayek Minford free market headbanger. Governments have outsourced economic management and the future demands seriously interventionist policies where markets are planned and regulated at the top level including ensuring that their activities are subsumed under the requirements of combating climate change.

  • Comment number 15.

    Classical economic theory always seems to assume that growth is a good thing. But we are reaching the stage globally where one world has to support a population which has grown to the point which has become virtually unsustainable. In this instance biology probably shows the way rather than economics.

    In biology populations grow according to an "S" shaped curve and after a period of exponential growth the population flattens out before crashing spectacularly. I fear we could go the same way but hope that our intelligence would mean we can avoid the crash which occurs when something limits the population when in a closed system. This is usually food, water, oxygen etc. In the case of the human population would include fuel supplies as well.

    Surely the solution means acccepting the fact that the planet is not an inexhaustible supplier of food/fuel/water etc and to start to live sustainably and within our means as a species. On a global scale this means those of us in the west consume less so allowing our poorer neighbours their fair share. In this case economic growth in the west is impossible so all the economic theories we have around at the moment are useless.

  • Comment number 16.

    'using the state spending to boost demand'???


    Paul

    You and Peter Mandelson both claim this is the case, but this part of 'fiscal stimulus' is just not the way it is.

    'State spending' needs a bit of qualifying when it involves contracts to overseas companies, who then bring in own workers. So where's the stimulus? Not the earning spending cycle, not profits reinvested here.

    Just to leave it hanging without pointing out those qualifiers is a little bit naughty, a little bit misleading. No actually quite a lot.

    Mandelson - that's what he does. But why do you do same? Politically correct? Is this really the time. No we need truth.

    Liam Halligan always talks a lot of sense.

  • Comment number 17.


    Whilst Peston & Flanders seem to be slowly drifting back into their day job, more strange things are happening in the weird and wonderful world of fiat flappy paper IOUs:

    http://www.kitco.com/ind/Nathan/aug312009.html

    "I suggest we all sharpen our eyesight -- the 'powers that be' just took the fiat system and the inflation threat to a new level."

    With a battle on three fronts, which of these Russian Dolls will be the first to crack?

    http://www.bbc.co.uk/blogs/newsnight/paulmason/2009/08/radical_capitalist_proposes_di.html

  • Comment number 18.

    Sorry Paul, im having to crash your blog seeing as your newish editor doesnt see the need for a blog any more and there is no programme driven blog. Please bring Wikipedia back on to Newsnight, i watched the segment last week on the erosion of editing rights with some interest, what caught my ear was that there was no need to worry as they would only be locking down entries about people who are still alive, this is untrue and im suprised your researchers didnt know this and coach Kirsty, i have just looked at plenty of entries, none of them connected to 'live' people and they cannot be edited either, yes, maybe entries on Al Queda and Pluto are contencious but if they are going to block those aswell then they are not being honest about this 'experiment'There is a large school of thought that Al Qaueda does not exist atall, this is not mentioned within the entry, someone in the comments section has even referred to a BBC documentary that talks about this, several days ago but it has still been blocked from the entry, this is just one example, please bring them back and run them over hot coals thankyou!

  • Comment number 19.

    #9 Jereboa
    Yes but of course Keynes was not really listened to at the time. And after the war I believe his proposal for a managed global reserve currency, the bancor, was rejected - then as now, and the $ based IMF set up instead. - a sorry solution crippled by "market adjustment" thinking.

    Two suggestions come to my mind. First, we do not really need to worry about "continual growth outstripping resources" in a recession: our problem is the unused available resources, the wretchedness of blighted lives here in our own underemployed people. I also suspect "peak oil" is a concept the companies readily market to boost their profits by artificially restricting supply with the aid of misapplied "green" propaganda- there seems to be masses of oil in E.Timor, Sudan,the Arctic etc along with a shortage of refining capacity, I wonder why?. Why do dozens of loaded oil tankers wander round our shores failing to discharge their cargo if prices fall a little closer to (certainly not below) supply costs?

    Second, as in Keynes' day, the problem is not one of ideas but of action - the monetary obfuscation and resistance put up by the comfortable against any policy that raises effective demand and stimulates supply to the benefit of the people. In finding the needed courage to take action, we are crippled by the party political system. Our mainstream politics is funded by commodity traders and real estate speculators and international financiers: giving us our failed "democracy of the parties". Perhaps British democracy is basically demagoguic plutocracy -the periodic agitation of the poor for the benefit of the rich.

    As you say times change - cometh the hour, cometh the man: we still await him! Changing the bums on the seats of the Crooked Parliament won't have much impact. Hard work from below is needed to producee the energy we found in the Liberals in 1906 and Labour in 1945, the energy that would make short work of dealing with MOD supply failures and bankers' pension contracts. Perhaps our New Model Cromwell will emerge from the politics of identity and nationhood? England's crisis today has social not economic roots: we have lost an Empire and not yet found a role.

  • Comment number 20.

    8# Hawkeye.

    Very interesting link re SDR's - is this the shape of things to come ? and does it offer an equivocation between unpayable debt (US and some of the West) and unrecoverable loans (China etc).

    Fiat money relies on trust and exchangeability for value. The US broke the faith, is IMF moving towards being the new vehicle of belief ?

  • Comment number 21.

    #19 misswelham

    I think it was the chairman of BP who said recently that undersupply was more a function of regional social / political influence than geological availability. A fascinating admission I thought and one which resonates with your post also albeit in a different manifestation. It all points back to the same thing does it not, it points back to the underlying philosophies which drive the world are no longer fit for purpose in a globalised communication and marketplace environment.

    Perhaps it is not so much 'peak oil', or 'peak population' or 'peak comodities in general', it is actually 'peak underlying human philosophy (operating system if you like)' which is screwing everything up and unecesarily increasing the quantum of human suffereing beyond where it could be.

    I don't think it will be an economist who sorts that one out though!

    Keep posting, you clearly seem to know what you are talking about, are unleveraged and perceptive, there seems to be a collection of similar people accumulating under Paul Mason's blog which can only be a good thing.

    its jericoa by the way (named after a beach in brazil) not 'Jereboa' although I was tempted to think that was a deleberate joke at my expense :)

  • Comment number 22.

    I have three friends who are on full disability benefit, living in London. They each have council houses. They are in two separate boroughs. In the last week, each of them (two a couple, by the way, living separately to maximise benefits) told me that they are having their flats totally refurbished - that's new kitchens, bathrooms, painting and decorating, the works. One of them complained that her kitchen was perfectly fine and she would rather not have the disruption! I am absolutely horrified. It would appear that this is government policy across the board. I know what it costs to refurbish a home, as I'm sure many of us do, and I cannot believe that with the country in so much debt, every council house is having tens of thousands spent on it! How can this be right? How can we bring this scandal to public awareness?

  • Comment number 23.

    At 1:21pm on 02 Sep 2009, stanilic wrote:

    "Perhaps the economist that will finally sort this out has just passed his GCSEs."

    What makes us think that a) it will be a British (Western) person that resolves this crisis, and b) that they will be an economist ??

    Last week I described 3 layers to the crisis, and asked which one will collapse first:
    1) The financial sector
    2) The monetary system
    3) The world eco-system (energy/environment/pollution etc.)

    It is now abundantly clear that the world monetary system is the one which will go through major upheaval first. And probably quicker than anyone is expecting.

    Bretton Woods was chaired by the WWII military victors. The Beijing equivalent (in 2010/2011) will be chaired by the PRC economic victors:

    http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100000821/china-bernanke-and-the-price-of-gold/

    So, the person (people) that sort this out, are highly likely to be Chinese, and - more surprisingly - not economists but engineers (in the REAL sense, not financial "engineering"!):

    http://www.bbc.co.uk/blogs/thereporters/stephanieflanders/2009/09/g20_meeting_doing_what_needed.html

    "Once again, it's fascinating to see how often it is engineers who are at the forefront of demands for a better system for creating money" from David Boyle's The Money Changers

  • Comment number 24.

    #22 blueshinything

    To be honest i think the public are painfully aware of it but noboddy has come up with any answers to it yet. We have to keep knocking down perfect;y good stuff and building new ones to keep people busy on the one hand and keep the underclass whom have no real prospect of work 'placated' on the other hand.

    The only reason there has been no social unrest is because the benefits system allows those whom would otherwise be very restless (about 5 million of them) to claim incapacity benefit for some easily faked condition (depression or back trouble etc, topped up with unemployment, housing benefit, child benefit and odd job black market income such that they can live in a reasonable house with broadband, sky plus and buy a crate or 2 of high strength lager a week.

    The politicians are so afraid of this balooning underclass and what they may do if they are not kept placated that there is no real will to change the current system all us hard working responsible types think is so unfair.

    To be honest it is not really the 'benefit scroungers' fault either, they are the victims of an economic system which is still in denial about the obvious fact that an economic model which relies on continual 'growth' ain parallel with continual efficiency in how we make things is well....******** IMPOSSIBLE FOR GODS SAKE.

    There is not enough truly valuable work for people to do to get paid good salaries for ever since most of our base needs became catered for by mechanisation and mass production fuelled by millions of years of stored energy in the ground ( coal, Oil gas etc).

    Its just so obvious on even a basic intellectual level but equally it is so fundamental to how we live and everything we do that nobody in the gutless morally bankrupt political class with clout has the courage to state the obvious and even debate it when it is obvious it is the defining issue of our times!!

    They prefer to pretend it does not exist and try to get re-elected on the basis that they will be the best people to 'restore jobs, prosperity and growth'.

    It is totally laughable, if anybody out there remembers the 'aliens' from the 'smash' dried potatoe add, if there are any aliens out there I think they would be too busy laughing in a similar manner and be far too entertained by our gross stupidity as arace to intervene in this merry farce!!!



  • Comment number 25.

    Re- post 24 Jericoa

    Thanks for your reply. I agree with what you say - the pink elephant is alive and well and, like good, well-behaved members of the middle-class, no-one has the energy or appetite to take it on. Turning a blind eye is by far the more palatable solution (and, as you say, there is little political will to tackle it). BUT IT"S GETTING OUT OF HAND.

    There was little political will to refrain from starting a war in Iraq, but at least we stood up and protested about it. It didn't stop the war, but the events that have subsequently unfolded have vindicated the anti-war lobby. At least it's part of the conversation today, which is more than this ludicrous abuse of public money (that everybody's aware of) is. We have to start talking about it openly. It has the potential to cripple this country - if enough people continue to claim 'disability', we will indeed become the disabled nation. It's happening already.

    I know there is no political will to get it on the agenda, but surely the journalists are game? Or maybe there's something I'm not understanding about the relationship between politics and journalism. That's why I wanted to join this blog - in the hope that Paul Mason would read this and consider the possibility of putting this topic on the agenda - why should we stand by and watch ourselves be slowly (but surely) rendered victims ourselves?

    I want to say something about the underclass that you refer to in your posting, too. I don't believe they are as homogeneous as we like to think - it's easier for us to lump them all into one basket, as (would be) blue collar workers, who have perhaps never worked and whose parents gave up working in favour of 'the soc' long ago. In my experience, there is a new breed of benefit dwellers emerging - people from good homes with higher degrees - after all, isn't it quite a smart move to be getting as much as you can for nothing?

    Let me give an example or two. I know several people (three come immediately to mind) who are university educated and who are now on incapacity benefit, because they have ME (MyoEncephalitis, I believe that stands for). ME has a raft of non-specific symptoms that range from tiredness to apathy to poor memory to aching limbs - indeed, I myself have thought I have ME on various occasions. As an aside, when I was in Australia recently and mentioned 'ME' no-one knew what I was talking about - ME is becoming a British disease. So, back to the tired trio...

    Each of them is now on full benefit, having their mortgage interest paid for (OK, not so much now, but it will be). One of them has been given a brand new car as well, compliments of you and me. One thing they have in common is a very good psychotherapist (a veritable fairy godmother), who offers sessions in 'maximising your benefit', with the express purpose of having them leave their jobs and take a break (which she feels is their right). She used to work in the benefits system, so knows ALL the loopholes. She is known for setting people up, so that they can live comfortably on benefits, have enough to pay her (for the rest of their lives) weekly therapy fee - and everyone's happy!!

    In my opinion, it's this kind of attitude of entitlement combined with victimhood that is seeping into the white collar consciousness - it's an outrage and it's happening now.

    Let me give you another example. I have an acquaintance who was diagnosed with MS ten years or more ago. In the meantime, she saw a doctor who told her in fact she doesn't have MS, but they'd 'keep it between themselves, so that she could continue on benefit'! This woman has never paid a penny of tax in this country and is now set up for a rosy retirement here, all expenses paid, compliments of you and me. She is also as healthy as you and me (assuming you're well, which I do hope). This is another example of white collar workers eroding the whole benefit system - what do they think they're doing? Do they need to be liked that much?

    I could go on. My point is that until we start looking at the truth of what's going on, we're just going to turn a blind eye and the monster will grow. This is not just about 'those who would otherwise be very restless' to quote your post. The people who are screwing it are increasingly an educated class who don't see why they shouldn't have what 'the otherwise restless' have.

    A while ago, I had to make the choice - either beat them or join them. i decided that to adopt the victim stance could only do me harm in the long-run, no matter how much I stood to gain financially. But there are people like me (middle class, professional) who are making the choice to join our brothers in the victim underclass, which, in fact is fast becoming the privileged class. They will see us out if we allow it to continue. Not only that, but it degrades us all - do we really want to become a nation of helpless victims?

    Please, Paul, if you're reading this, can you consider a story that shines a light on this increasing problem, now being made worse by all the money being thrown in to support this madness. As we all know, its consequences are far more wide-reaching than my petty sense of disenfranchisement - from breaking the spirit of this country to bringing in more and more freeloaders who accurately see this country as a soft touch. This issue IS the crux of the economic problem - or close to it.

    I ask that the pink elephant be named at least. That would be a start.

    Bit of a rant I know. Thank you for this forum

    BST


 

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