Many years ago, when teaching A-Level economics, I taught in room 16. Two doors away, in room 14 a colleague, Mrs Bates, taught O-Level home economics. Quite properly, Mrs Bates taught the importance of balancing the household budget, possibly referencing Mrs Beeton: expenditure should not exceed income. In room 16, by contrast, I was instructing the Upper Sixth in the mysteries of Keynesian economics. The latter meant that in a recession, with spare capacity in the economy and particularly where interest rates were low, the government should seek to kick-start the economy through deficit finance.
Home economics vs Keynesian economics
What did this mean? We have to assume that the nation in question has its own central bank (in our case, the Bank of England) that has control of the nation’s money supply and can act as the government’s ‘lender of last resort’. In the UK we can tick these boxes. So in these circumstances, the government might choose to reduce taxation (leaving more money in the hands of taxpayers) whilst spending more by instituting public works (for example, improving flood defences or building wind farms).
In the short run, as tax revenues fall and expenditure on public works increases, a yawning deficit arises in the government’s budget. In this same short run, the government covers its deficit by selling bonds (government debt) that the markets might agree to buy (because the markets can follow the logic of Keynesian economics) and any unsold bonds are bought up by the Bank of England – our ‘lender of last resort’.
In the medium term, the economy starts to recover (in economists’ parlance, there is an increase in aggregate demand). Taxpayers who have enjoyed a tax reduction have started spending more. At the same time, people who were previously unemployed have found work building flood defences and wind farms and are spending their new income. Firms supplying parts for flood defences and wind farms have fuller order books and take on staff. The government finds itself paying out less cash in unemployment benefits and receiving an increased flow of tax income as employment and activity pick up. The deficit in the government’s budget self-corrects.
Conservative opposition to Keynesian economics
Those of a conservative, right-wing disposition have a gut dislike of Keynesian economics because it involves the state having a key role in the management of the economy. Conservatives in the UK – George Osborne and Jeremy Hunt, for example – are ‘small staters’, seeking to minimise the role of government. Consequently, they are keen to portray the economy as closely akin to a household economy. Theirs is the economy of Mrs Beeton rather than of John Maynard Keynes.
Public perception and economic knowledge
Few of the UK public have had an education in Keynesian economics and hence find it easier to latch on to the idea of the national economy being just like their household economy. Hence it has always been easy for Osborne, Rishi Sunak and Hunt to promote anti-Keynesian ideas. However, within our university economics departments (and many institutions internationally) the ideas developed by Keynes remain the bedrock of their research and teaching. (It needs to be pointed out that there are many schools of economic thinking of which Keynesianism and neo-Keynesianism remain just one. But it is a healthy school and a long list of Nobel Prize winners in economics come from that school.)
Rachel Reeves – changing ends?
Where does Rachel Reeves fit into all this? Reeves has a first degree in economics (PPE, Oxford) as well as a master’s degree, and had a spell working at the Bank of England. Ten years ago, as shadow finance minister, she betrayed her Keynesian credentials by astutely criticising the fiscal rules being operated by Osborne as chancellor.
Moreover, two years ago, Reeves was fully behind the flagship Labour economic policy of a £28bn per year Green Investment plan, a distinctly Keynesian idea that followed the successful plan implemented by Biden in the USA. Sadly, in the last two years, Reeves and Labour have rowed back on this commitment.
Labour’s retreat to ‘mediamacro’
Mediamacro is a term of derision coined by Simon Wren-Lewis, emeritus professor of macroeconomics at Oxford University. It is a criticism of how the right-wing press and TV misrepresented how the economy worked. Regrettably, Reeves’s recent rhetoric has shifted to unadorned ‘mediamacro’.
If, in the run-up to the election, the voting public were buying into the ‘household’ model of the UK economy, then Reeves and Labour promised to be part of that. In 1942 in a radio interview, Keynes bullishly asserted “Anything we can actually do we can afford”. Sadly, of late, Reeves has repeatedly inverted that phrase, alleging “If we cannot afford it we cannot do it”.
As the eminent economist Jonathan Portes commented “It was the anti-Keynes mentality that gave us austerity in 2010”.
The way out
There are ways out of this. In previous Yorkshire Bylines articles, I have flagged up where funding for increased government can be found. In just the past week, The Guardian and Observer have carried other articles (for instance, by Polly Toynbee, Aditya Chakrabortty and William Keegan) that, to a greater or lesser degree, are critical of Reeves and suggest that she should be less conservative. I am a paid-up Liberal Democrat and an unreconstructed Keynesian. In the recent election, I voted for Labour as a tactical measure to help get the Tories out (success!). I had hopes that Labour would have a bolder, more progressive fiscal policy, following the guidelines set down by Keynes. To date, I am profoundly disappointed.
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