The economics of despair

Co-authored with Marcus Miller

Across Europe, austerity policies have caused stagnation and despair. There is a more humane way to restore our fortunes.

Lionel Robbins defined economics as the study of the allocation of scarce resources among competing uses. For an economy at full employment, where the opportunity cost of government spending is the private spending it displaces, this remains a good characterisation. But what if there is a deficiency of aggregate demand, so the nation’s resources are being underused – as evidenced by significant involuntary unemployment? In this case, in so far as it employs unused capacity, expenditure by the government will add to the resources available for investment and consumption. This is conventionally measured by the “multiplier” – the ratio of extra output available per unit of government expenditure. If the multiplier is equal to one, for example, there is no opportunity cost to public spending, in effect: the resources would otherwise be unused.

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Meeting our Makers

In the early 1950s, Britain was an industrial giant. Today it is an industrial pygmy. Manufacturing was industry’s bedrock. In 1952 it produced a third of national output, employed 40% of the workforce, and made up a quarter of world manufacturing exports. Today manufacturing is just 12% of GDP, employs only 8% of the workforce, and sells 2% of the world’s manufacturing exports. The iconic names of industrial Britain are history: in their place is the service economy and supermarkets selling mainly imported goods. What happened? Was it inevitable? Does it matter?

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Coordination vs Disintegration

Since its collapse in the autumn of 2008, the world economy has gone through three phases: a year or more of rapid decline; a bounce back in 2009-2010, which nevertheless did not amount to a full recovery; and a second, though so far much shallower, downturn this year.

The resulting damage over the past four years has been huge. The world economy contracted by 6 per cent between 2007 and 2009, and recovered 4 per cent. It is 10 per cent poorer than it would have been, had growth continued at the rate of 2007, and the pain is not yet over. Today, we are in the first stages of a second banking crisis. It may already be too late to avoid a “double dip”, but it may still be possible to avoid a triple dip. For this we need a robust intellectual analysis of what is required to ensure durable recovery, and the collective political will to implement it.

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Back from the Brink by Alistair Darling

Alistair Darling’s story of his time as Gordon Brown’s Chancellor of the Exchequer is intriguingly titled Back from the Brink. There are many brinks in this book – the near-collapse of the British banking system and the world economy, for one. The relationship between Mervyn King, governor of the Bank of England, and Callum McCarthy, then chairman of the Financial Services Authority, is also said to have been “on the brink of collapse”. But the brink that Darling is chiefly concerned with is his relationship with Gordon Brown. Frequently they contemplated divorce on the grounds of incompatibility, but soldiered on like an estranged couple, tied together by old loyalties.

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The Osborne Ultimatum

The ideas of two dead economists, David Ricardo and J M Keynes, are shaping the cuts debate. The coalition is in thrall to the former’s small-government agenda and says there is no alternative – but its plans aren’t working.

The course of deficit cutting has been set in stone and few expected that the Budget, announced on 23 March, would dislodge it. The purpose of this article is not to supply the facts and figures of the Chancellor’s policy failings – though these are plentiful – but to explain why his policy of slashing public spending cannot be expected to produce a robust recovery. To put it simply, it is based on false premises. This gives Labour an opportunity to wrest the intellectual initiative, but only if it can develop an alternative policy, based on a better theory of the economy.

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Vince Cable is working. The Coalition isn’t.

Vince Cable’s essay in the 17 January issue of the New Statesman (“Keynes would be on our side”) is the first, and very welcome, sign of a senior coalition politician being willing to engage in a serious public debate on economic policy. It is in a different intellectual league from the jejune meditations of the Chancellor, George Osborne. Cable has written a well-argued – but ultimately unconvincing – defence of the coalition’s economic strategy.

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When confidence is shattered

I.

In economics, you cannot convict your opponents of error, but only convince them. Economics isn’t like physics; you can’t conduct controlled experiments to prove or disprove your theories. History provides a very partial way of overcoming this weakness. No events repeat themselves exactly, but past events offer some kind of test of current theories about the economy. The main question of current interest is the effect of fiscal consolidation.

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For a New World, New Economics

The 2008 financial crash and the shift of power from west to east raise questions about the future of capitalism. Robert Skidelsky appraises the latest thinking, from Ha-Joon Chang, Anatole Kaletsky and Ian Bremmer.

23 Things They Don’t Tell You About Capitalism
Ha-Joon Chang
Allen Lane, 304pp, £20

Capitalism 4.0: the Birth of a New Economy
Anatole Kaletsky
Bloomsbury, 416pp, £20

The End of the Free Market
Ian Bremmer
Viking, 240pp, £20

These three books are about the future of capitalism. Their inquiry is stimulated not just by the financial collapse in 2008-2009, but by the shift of power from west to east. These events have robbed free-market capitalism of much of its sheen. Anatole Kaletsky says it will be replaced by “Capitalism 4.0”, Ha-Joon Chang by a “better-regulated capitalism”. Ian Bremmer discusses the rise of “state capitalism”. None of them sees socialism as an alternative. Chang and Kaletsky also discuss the future of economics. They both believe that bad economics – “free-market ideology” or “market fundamentalism” – lay behind the global crash of 2008. Of the three books, Chang’s is the most successful, Kaletsky’s the most ambitious, Bremmer’s the most conventional.

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