Economic Recovery in the Age of COVID-19

The COVID-19 pandemic is an invitation to what the economist Joseph Schumpeter called creative destruction: a chance to liquidate obsolete investments and to create something new, better, and, in the jargon, more ‘resilient’ and ‘sustainable’. Schumpeter understood that humankind does not progress in a balanced way, rather it lurches from one extreme to another, each extreme producing its own reaction.

In political economy, the subject of this contribution, the excesses of the Keynesian social democracy in the 1970s brought about the extreme reaction of neo-liberalism. The hubris of neo-liberalism – its failure to guard against the ever present possibility of collapse, its inattention to social justice, its reckless embrace of globalisation, its Faustian pact with consumerism – has in turn bred a reaction, but to what is as yet unclear. Populist forces of Right and Left, made up of fragments of old and new discontents, compete for the succession. The balance remains elusive.

We have both a short-term and long-term crisis on our hands. In the short term we run the risk of what some analysts are calling the Third Great World Depression. In the long run the risk is of the exhaustion of Nature’s tolerance for our profligate habits. The prize is to enfold our pandemic recovery measures into a long-term strategy for a sustainable way of life – I will not say growth, for growth as we understand it may not be sustainable.

The short-term threat to jobs and livelihoods is clear enough. Much of Europe is on a life-support system. The world economy will have shrunk by about 5% in 2020, and hopes of a V-shaped recovery have been put on hold. This means that unemployment is set to go on rising through 2021. In the UK, we expect an unemployment rate of close to 10%. Everyone is waiting for the end of the coronavirus pandemic so that we can get back to ‘normal’. But the virus is no longer the main problem: it is the scarring of the economy produced by a prolonged and continuous period of non-work which will damage the recovery.

And what about the further future? Suppose by a heroic effort we succeed in reopening economies much as they were before. Can anyone say they were in a healthy or sustainable situation before the pandemic struck? Debt-driven growth models which produced consumption and asset booms followed by financial busts: that was the pre-pandemic normal.

I am often asked, what would British economist John Maynard Keynes have said? I will try to give my answer, though I hasten to add that Keynes, from beyond the grave, has not authorised me to do so. Nor is Keynes the last word on the matters I will deal with.

Then and now

My book Keynes: The Return of the Master (Skidelsky, 2009) was published in the autumn of 2009. It was published the year after the global banking collapse of 2008 and the massive rescue operations undertaken by governments all round the world – not just the bailout of a bankrupt banking system, but also large monetary and fiscal stimulus. This activism was in contrast to the ‘do nothing’ stance of governments following the Wall Street crash of 1929. I believe that it prevented another Great Depression: the fall in output following the 2008 collapse was limited to four quarters, whereas output went on falling for thirteen quarters after the collapse of 1929.

Long before recovery was secure, however, our own stimulus was terminated. Alarmed by the deficits they had incurred, governments started to slash public spending. The ‘return of the master’ proved brief. “I guess everyone is a Keynesian in a foxhole” said Robert Lucas, high priest of Chicago economics. Keynes was for emergencies only.

And we have the same reaction today. Compelled to close down a large fraction of their economies to stop the spread of the coronavirus contagion, governments have spent money freely to keep up the incomes of millions of people prevented from working. But they continue to hope that as the economy reopens, a V-shaped recovery will relieve them of their fiscal burden. The talk is of ‘fiscal sustainability’, the need for consolidation and debt reduction even as the economy is set to shrink.

Many would see this as a reasonable position. Most economists view the market system as fundamentally healthy. It will get sick from time to time and therefore need medication, but it is basically self-healing, like the human body. So treatment should be limited in scope and duration. This is particularly the case given the unreliability of political medicine. Keynes rejected this analogy between the market system and the self-healing body and believed rather that a market system left unattended by the state could never be healthy.

Keynes for beginners

Keynes’s revolutionary insight was that capitalist market economies do not have an automatic tendency towards full employment. This assertion shocked the economists of Keynes’s day, whose models taught them that persisting unemployment was impossible if wages were flexible. Keynes’s Cambridge colleague Arthur Pigou expressed the typical belief of 1933: “With perfectly free competition…there will always be a strong tendency for wage-rates to be so related to demand that everyone is employed” (Pigou, 1933). Based on this argument, unemployed workers must be choosing not to work. Seeing the millions unemployed all around him during the Great Depression, Keynes thought: There is something wrong with your model! These people are not choosing not to work. They cannot find work at any wage.

Keynesian economics starts with this blinding shaft of common sense. People are unemployed when there is no demand for their services. Yet this insight never fully converted the economics profession, who went on cooking up all kinds of fancy reasons to demonstrate that what looked like unwanted unemployment was really a ‘choice for leisure’. Today I would wager that most economists believe, deep down, that most unemployed people could find work if they really wanted to, or if state benefits did not provide them with an alternative income.

But why do economies not quickly bounce back from collapses? Surely, if an employer does not want to employ me at £500 a week, I can always lower my wage requirement till it becomes profitable for him to employ me. By insisting on unrealistic wages, workers are ‘pricing themselves out of employment’. But Keynes gave two reasons why even flexible wages will not maintain or restore full employment.

Wages and demand

Keynes’s first argument was that every producer is also a consumer: my wages are your income, because my wages buy your goods. If my wages go down, your income goes down, too. The general principle is that cuts in production costs (whether by cutting wages or by laying off workers) deepen a slump by simultaneously cutting total demand or spending power. A fall of income in one part of the economy reduces production in another part, and so on, in a downward spiral as unemployment spreads rapidly throughout the economy. Eventually spending power is stabilised at a much lower level as people stop saving. But nothing has happened to stimulate consumption, and therefore to promote a recovery. The weird idea that the way to revive an economy is by getting everyone to stop spending comes only to a well-trained neo-classical economist.

Confidence and money

Keynes’s second argument against the V-shaped recovery model had to do with the behaviour of money. It is characteristic of a slump that instead of investing their money, businesses ‘hoard’ it, or ‘add to their cash reserves’. The greater this ‘liquidity preference’ is, the higher the rate of interest that owners of money will charge to lend it out. But to stimulate production, borrowers need lower rates, not higher rates. So when confidence is low, the higher rates demanded by the banks for loans mean even less investment, less consumption and less employment.

In this way, flexibility of wages and stickiness of interest rates combine to deepen the slump. Contrary to Robert Lucas, without government ‘stimulus’ the economy will remain stuck in the foxhole.

But the mainstream economist has a comeback: depressions or deep recessions are very rare events, like Nassim Taleb’s ‘black swans’ (2008). So it is absurd to organise economic life as if the next slump is just around the corner. Market economies have built-in stability so powerful that slumps will be very rare. This is exactly what Keynes denied: black swans can fly out of a clear blue sky at any time. We have just seen a large flock of them in 2020.

The reason, Keynes said, was that the theory of the ‘self-equilibrating’ market economy depends on the idea that everyone, and particularly investors, can accurately predict the future. If they can accurately calculate what assets they buy today will be worth in ten years time, they would never buy things at the wrong prices. As Keynes (1937) wrote: “The calculus of probability…was supposed to be capable of reducing uncertainty to the same calculable status as certainty itself”. But this was a myth. “Actually…we have as a rule, only the vaguest idea of any but the most direct consequences of our acts” (Keynes, 1936). This was the second huge shaft of commonsense to pierce the mathematical precision of forecasting models.

And a huge consequence followed. Because the future is uncertain, private investment – which depends on the expectation of future yield – will be unsteady. Prosperity will depend on peoples’ ‘animal spirits’. When they are feeling confident, they hire more workers; when they are pessimistic, they hire fewer.

Stabilisation policy

Two conclusions follow from this account of market behaviour: 1) Collapses are always possible because the future is uncertain; and 2) When they happen, there are no ‘automatic’ market mechanisms to ensure a quick bounce back.

That is why governments are indispensable ‘balancers’ of market economies. They add and subtract spending power as and when needed.

This explains why there is no virtue in trying to balance the budget as such. Being Keynesian means having a theory of the economy that justifies the use of the state budget to balance economic activity at an optimal level of output and employment. This can mean either a budget surplus or a budget deficit or a balanced budget, depending on what is happening in the economy. It is the accounts of the economy that it needs to balance. Without this balancing act the economy will have a spontaneous tendency not to full employment but to underemployment.

To maintain economic life on a balanced, even keel, governments need to do two things.

First, they need to steady the rate of investment. They can do this through public investment programmes. Keynes (1936) wrote: “I expect to see the state, which is in a position to [take] long views…taking an ever greater responsibility for directly organising investment”. This happened in the 25 years after World War II, but since the 1980s, the state’s share in total investment has fallen drastically, increasing economic instability. Notice that a large state investment share is not just a policy for the foxhole but a permanent part of economic management.

Secondly, governments should pursue counter-cyclical policy to limit the effect of remaining fluctuations. This means injecting extra spending into the economy when private spending falls and curtailing it when it rises. It can be done on the tax side, or spending side, or both. The ‘multiplier’, based on what is called ‘the marginal propensity to consume’, tells governments what the multiplied effect of any spending they add to or subtract from the economy will be.

The answer to the failures of both old-fashioned Keynesianism and newfangled monetarism is not to abandon the balancing role of the state, but to make it as automatic as possible. The state should commit to two things: a rolling programme of public investment and a public sector job guarantee.

The first would reduce fluctuations in investment to much narrower limits; the second would provide a buffer stock of jobs, which would automatically expand in a downturn and deplete in an upturn.

Public investment does not require public ownership. Much of it could be done by quasi-state institutions like public investment banks or funds or state-holding companies. These would operate under a broad central government mandate or ‘mission’ to use Mariana Mazzucato’s word, that reflects national purpose, but which insulates commercial decisions from political meddling.

The ‘counter-cyclical’ public sector job programme would be centrally financed, but with projects chosen and administered locally. The result of both policies pursued together would be to abolish unwanted unemployment for the first time since the Industrial Revolution.

These two balancing functions, public investment and counter-cyclical policy, are needed to ensure the full employment and stability of capitalist market economies. And the fuller the use of a country’s human resources, the more prosperous the country will be, the greater the social contentment and the less the danger of political extremism. This – in a nutshell – is the message of Keynes for our day.

Three objections

Now let us consider three neoclassical objections to Keynesian theory and policy.

First, as we have seen, economists believe the market economy to be much more naturally stable than Keynes supposed. Hence they view Keynesian demand management as inherently destabilising. History does not support them. The most stable period in modern times, with the fullest employment and fastest growth rate, has been the period from 1950 to1975, when Keynesian theory and policy was in control.

Second, anti-Keynesian economists teach that public investment ‘crowds out’ private investment. This is true if a government adds to public spending when all the economy’s resources are already fully employed. It is a cousin of the idea that public borrowing merely adds to the burdens of future generations. But whenever there is spare capacity, public investment can ‘crowd in’ private investment by increasing total demand for goods and services. Most governments drastically cut public investment after the 1970s. Growth was halved and unemployment rose. Some public investment is bound to be ‘wasted’, but this has to be compared with the waste of unemployment.

Third, monetarist economists – descendants of Milton Friedman – claim that Keynesian counter-cyclical policy is inherently inflationary. Vote-catching will lead Keynesian politicians to print too much money, resulting in creeping and eventually accelerating inflation.

Behind the monetarist argument is the belief that there is only one shock against which policy has to guard: government, which is governments ‘monkeying around’ with money. Instability in the price level can delude people into trading at false prices, disturbing the natural equilibrium of market transactions. If the key to economic stability is a low and constant rate of inflation, then control of the money supply (or equivalently) of interest rates needs to be taken out of the hands of politicians and vested in independent central banks.

History gives only qualified support to the monetarist thesis. Inflation was subdued throughout the 25 years of the Keynesian era and only started to rise at the end of the 1960s, for reasons much more connected with the Vietnam War than with Keynesian economics. As for the inherent stability of an economy with stable money: a decade of low inflation did not prevent the financial collapse of 2008-09.

Nor did quantitative easing – flooding the economy with central bank ‘base money’ or M0 in 2009-12 – bring about a robust recovery after the collapse. The aim of quantitative easing was to lower the cost of borrowing by forcing up the price of bonds. Its fallacy lay in the belief that the ‘money supply’ (which includes ‘broad money’ or bank credit) is directly under the control of the central bank. How much bank credit an expansion of base money brings about depends on Keynes’s ‘animal spirits’. A very high rate of interest can sometimes kill off a boom; but even a negative rate of interest might not produce recovery if expectations of profit from increased investment are zero.

Neoclassical economists are not the only critics of Keynesianism. Marxists would claim that such an updated Keynesian programme is just pie in the sky. A capitalist economy needs a ‘reserve army of the unemployed’ to keep up profits by keeping down wages. Only a fully socialised economy, they say, can abolish unemployment and maintain wage growth. The answer is that between 1950 and 1975, Keynesian-managed capitalist economies averaged unemployment rates of 2% to 3%, half of what they have been since; they had doubled the growth rates we have since had, with rising rather than stagnating wages; and at a cost in inflation only slightly higher than we have experienced under monetarist management.

No system of political economy is perfect. But it should be judged not by comparison with some ideal system, but with the realistic alternatives. Keynes set out to save democracy from the two challengers of his day – fascism and communism. He said that if we continued with laissez-faire in the face of massive unemployment, political freedom would not survive. “But it may be possible by a right analysis of the problem to cure the disease whilst preserving efficiency and freedom” (Keynes, 1936).

I would echo him today. I doubt if western populations will for much longer tolerate a political economy that delivers persisting underemployment, frequent crashes, stagnant wages, and extreme inequalities of wealth and income.

In thinking about our post-COVID-19 world, Keynes is an excellent start, but he did not solve all economic problems. Although he assumed that the desire to consume more would eventually be satiated by abundance, he had no inkling of long-run ecological constraints on growth. Keynes understood that inequality was both an economic and ethical problem, but his theoretical work was directed to overcoming unemployment, the big problem of the day, and he did not link it to the unequal distribution of wealth, which we are much more likely to do today.

European context

Let me conclude by putting what I have just said into a European context. This is a serious question, because while the rules of the European Union prevent member states from pursuing Keynesian policies at the national level, there is no provision for European-wide Keynesianism.

The fundamental design flaw of the eurozone has often been pointed out; it created a monetary union without three crucial tools which are needed to stabilise economies: a budget big enough to act as a balancer, a fiscal transfer capacity to deal with asymmetric shocks and a lender of last resort for the banking system. These were not accidental omissions. The European Economic and Monetary Union was built on the belief that they were unnecessary. The creators of the Union accepted the Friedman monetary doctrine that rule-governed market economies are naturally stable, which was consistent with the long-standing anti-inflationary views of the German Bundesbank. But it was worse than that: the eurozone treaty forbade the use of stabilising tools at the national level. What this meant is that the Union as a whole was badly equipped to deal with the kinds of shocks to which market capitalism is prone.

The conventional, or German, view of the financial crisis of 2008-09 was that it resulted from excessive public debts and fiscal profligacy of the Mediterranean countries. Had these countries balanced their budgets as the rules prescribed, the financial shock could have been avoided. The alternative, and I think correct, view, is that the Union provided no non-deflationary mechanism for adjusting current account imbalances between its members. Keynes’s remark of 1941 applies very accurately to the EU: “The process of adjustment is compulsory for the debtor, and voluntary for the creditor: the debtor must borrow; the creditor is under no such compulsion.” His Clearing Union set out to remedy this design flaw in the global system by providing for creditor adjustment, but no such mechanism was established in Europe. As result, Germany in particular was left free to pile up current account surpluses without limit. The system was maintained by an unstable system of creditor loans which dried up the moment debtors got into trouble.

With the fiscal policy of all member states constrained by balanced buget rules and public debt ceilings, monetary policy – the weaker stabilisation instrument – was the only macro policy available. Mario Draghi, European Central Bank (ECB) president, found a way of bending the rules of the ECB sufficiently to rescue the EU from collapse in 2015. But he recognised the limitations of a purely monetary stimulus. In an interview with Financial Times, Draghi (2019) said:

I [have] talked about fiscal policy as a necessary complement to monetary policy since 2014. Now the need is more urgent than before. Monetary policy will continue to do its job but the negative side effects as you more forward are more and more visible. Monetary pumping worked, but more feebly that fiscal pumping would have.

Draghi proposed a budget for the eurozone large enough to be a stabilising tool: this has not been acted on.

The COVID-19 crisis has brought one promising institutional innovation. In July of this year, the European Commission proposed a €750 billion European Recovery Fund, dubbed Next Generatioan EU. This would authorise the Commission to borrow in the capital markets on the EU’s behalf and disburse the loans raised as grants and loans, split half-and-half to its members.

However, it has two obvious limitations. The European Council called the fund ‘an exceptional response to temporary but extreme circumstances’. In other words, it is not intended to become a permanent part of the EU’s institutional structure, so it is limited in size, scope and duration.

And secondly, it still has to be agreed by all 27 member states. As a result of continuous wrangling, no budgetary allocations have yet been made. What seemed like an imaginative leap forward looks like a quagmire. As one analyst has remarked “a sword of Damocles therefore hangs over the whole plan”.

Many member states are still betting on that V-shaped recovery. Germany and France are planning to cut their deficits next year (Germany from 6.35% to 4.25%) with the ‘peak of the stimulus’ seemingly past. The calls for consolidation are like those leading to self-induced double dip of 2011.


With the world on the brink of yet another steep recession, and with ecological disaster looming, we can no longer afford the luxury of an economic policy which concentrates on the fight against inflation, leaves unemployment to emergency measures, distribution of wealth and income to the market, and ignores ecological challenges.

Overcoming the scourage of unemployment, connecting its treatment to issues of just distribution nationally and globally, and linking both to a Green New Deal: this tripartite task is the biggest politico-economic challenge facing us.

* This article is based on Robert Skidelsky’s keynote speech at the Intereconomics/CEPS online conference “COVID-19: From Lockdown to Recovery”, 27 October 2020.


Draghi, M. (2019, 30 September), Mario Draghi declares victory in battle over the euro, Interview, Financial Times.

Keynes, J. M. (1936), The General Theory of Employment, Interest and Money, Macmillian.

Keynes, J. M. (1937), The General Theory of Employment, The Quarterly Journal of Economics, 51, 212-223.

Pigou, A. C. (1933), The Theory of Unemployment, Macmillian, 252.

Skidelsky, R. (2009), The Return of the Master, Allen Lane.

Taleb, N. N. (2007), The black swan: The impact of the highly improbable, Random House.

Keynes: die erneute Rückkehr des Meisters

In der aktuellen Corona-Krise wiederholen sich die Muster früherer Krisen. Vor dem Hintergrund sinkender Produktion und steigender Arbeitslosigkeit versuchen Notenbanken und Staaten weltweit ihre Ökonomien vor einem größeren Absturz zu bewahren. Die Rezeptur für diese Stabilisierungspolitik basiert auf der Lehre des britischen Ökonomen John Maynard Keynes, die dieser vor dem Hintergrund der Großen Depression im Jahr 1936 in seiner „Allgemeinen Theorie der Beschäftigung, des Zinses und des Geldes“ beschrieb. Doch nicht nur in der Krise, auch darüber hinaus empfehlen sich die wirtschaftspolitischen Ansätze von Keynes für das 21. Jahrhundert.

Mein Buch „Keynes: Die Rückkehr des Meisters“ erschien im Herbst 2009, ein Jahr nach dem globalen Bankenkollaps von 2008 und den massiven Rettungsaktionen, die von Regierungen auf der ganzen Welt unternommen wurden. Damit gingen der Bailout eines bankrotten Bankensystems sowie umfangreiche geld- und fiskalpolitische Konjunkturprogramme einher. Anders als nach dem Wall-Street-Crash 1929 blieben die Regierungen in der Krise 2008/2009 nicht passiv. Ich gehe davon aus, dass durch diese Eingriffe eine weitere Große Depression verhindert werden konnte: Während die Wirtschaftsleistung nach dem Zusammenbruch 1929 über 13 Quartale in der Rezession blieb, beschränkte sich der Produktionsrückgang nach dem Zusammenbruch von 2008 auf vier Quartale.

Mit dem Rücken zur Wand ist jeder ein Keynesianer

Bevor die Wirtschaft sich wirklich erholen konnte, wurden die Maßnahmen infolge der Krise 2008/2009 bereits wieder zurückgefahren. Die Angst vor einer möglichen Überschuldung ließ die Regierungen die öffentlichen Ausgaben kürzen und die „Rückkehr des Meisters“ erwies sich als kurzlebig. „I guess everyone is a Keynesian in a foxhole“, sagte Robert Lucas, der Hohepriester der Chicagoer Wirtschaft. Keynes war offenbar nur für Notfälle gedacht.

Heute ist das Muster ähnlich. Die Regierungen waren gezwungen, einen großen Teil ihrer Volkswirtschaften zu schließen, um die Ausbreitung der Coronavirus-Pandemie zu stoppen, und haben großzügig finanzielle Mittel bereitgestellt, um die Einkommen der Unternehmen und Millionen von arbeitenden Menschen zu sichern. Aber sie hofften, dass der Staatshaushalt bei der Wiedereröffnung der Wirtschaft entlastet wird, wenn der Aufschwung v-förmig verläuft. Damit die Staatsverschuldung nicht außer Kontrolle gerät, wird nun bereits wieder über Steuererhöhungen gesprochen.

Dies scheint vernünftig. Viele Unternehmer und Ökonomen halten das Marktsystem für grundsätzlich gesund. Es wird zwar von Zeit zu Zeit krank und braucht daher Medikamente, aber im Grunde ist es selbstheilend, wie der menschliche Körper. Deshalb sollte die Behandlung in Umfang und Dauer begrenzt sein. Dies gilt insbesondere angesichts der Risiken der politischen Medizin. Der britische Ökonom John Maynard Keynes (1883-1946) lehnte diese Analogie zwischen dem Marktsystem und dem selbstheilenden Körper ab und glaubte stattdessen, dass ein vom Staat unbeaufsichtigt gelassenes Marktsystem niemals gesund sein könne.

Keynes für Anfänger

Die meisten, die vom Keynesianismus gehört haben, glauben, dass diese ökonomische Schule darauf abzielt, Haushaltsdefizite zuzulassen. Das ist falsch. Keynesianismus ist eine Wirtschaftstheorie, die ein ausgeglichenes Produktions- und Beschäftigungsniveau mithilfe des Staatshaushalts ermöglicht. Das kann entweder mit einem Haushaltsüberschuss, einem Haushaltsdefizit oder einem ausgeglichenen Haushalt einhergehen, je nachdem, wie die wirtschaftliche Lage sich gerade darstellt. Es ist nicht von sich aus erstrebenswert, den Staatshaushalt auszugleichen. Vielmehr sollten konjunkturelle Auf- und Abschwünge ausgeglichen werden. Aber warum ist diese Balance so wichtig?

Keynes‘ revolutionäre Einsicht war, dass kapitalistische Marktwirtschaften nicht automatisch zur Vollbeschäftigung tendieren. Ihr Normalzustand tendiert zur Unterbeschäftigung, die sich bei einer ernsthaften Depression verschlimmert. Diese Behauptung schockierte die Ökonomen zur damaligen Zeit, deren Modelle lehrten, dass anhaltende Arbeitslosigkeit bei flexiblen Löhnen unmöglich sei. Keynes‘ Kollege aus Cambridge Arthur Pigou drückte diese Überzeugung so aus: „With perfectly free competition among workpeople and labour perfectly mobile … there will always be at work a strong tendency for wage-rates to be so related to demand that everybody is employed“ (Pigou, 1933). Ausgehend von diesem Argument, müssen sich arbeitslose Arbeitnehmer dafür entscheiden nicht zu arbeiten, indem sie auf Löhne bestehen, die die Arbeitgeber ihnen nicht zahlen können. Als Keynes während der Großen Depression die Millionen von Arbeitslosen um sich herum sah, bemerkte er, dass etwas mit den Modellen nicht stimmen kann! Die Leute wollen nicht arbeitslos sein. Sie finden unabhängig vom Lohn keine Arbeit.


Die keynesianische Ökonomik beginnt mit einem Paradigmenwechsel. Keynes geht davon aus, dass Menschen arbeitslos sind, weil es keine Nachfrage nach Arbeit gibt. Doch diese Überlegung hatte die Wirtschaftswissenschaftler nicht wirklich überzeugt. Sie führten alle möglichen ausgefallenen Gründe an, um darzulegen, dass das, was wie unerwünschte Arbeitslosigkeit aussah, tatsächlich eine „Entscheidung für Freizeit“ war. Noch heute würde ich davon ausgehen, dass die meisten Ökonomen tief im Inneren glauben, dass fast alle Arbeitslosen einen Arbeitsplatz finden könnten, wenn sie es wirklich wollten oder wenn ihnen staatliche Sozialleistungen kein alternatives Einkommen bieten würden.

Aber warum erholen sich Volkswirtschaften nicht schnell von Zusammenbrüchen? Was ist mit der Idee der v-förmigen Erholung? Sicherlich kann ich, wenn ein Arbeitgeber mich nicht mit 500 Pfund pro Woche einstellen will, meine Lohnforderung so lange senken, bis es sich für ihn lohnt, mich einzustellen. Der orthodoxe Wirtschaftswissenschaftler hat eine fertige Antwort parat: Indem Arbeitnehmer auf unrealistische Löhne bestehen, nehmen sie sich selbst die Beschäftigung. Gegen diese Annahme führte Keynes zwei Gründe an, warum selbst flexible Löhne die Vollbeschäftigung nicht aufrechterhalten oder herstellen können.

Kaufkrafttheorie der Löhne

Sein erstes Argument lautete, dass jeder Produzent auch ein Konsument sei: Mein Lohn ist dein Einkommen, denn mit meinem Lohn kaufe ich deine Waren. Wenn mein Lohn sinkt, sinkt dein Einkommen. Eine Senkung der Produktionskosten (sei es durch Lohnkürzungen oder durch Entlassungen von Arbeitnehmern) vertieft also einen Einbruch, in dem gleichzeitig die Kaufkraft und die Gesamtnachfrage verringert wird. Ein Einkommensrückgang in einem Teil der Wirtschaft reduziert die Produktion in einem anderen Teil usw. Es entsteht eine Abwärtsspirale, da sich die Arbeitslosigkeit in der gesamten Wirtschaft rasch ausbreitet. Schließlich wird die Kaufkraft erst auf einem deutlich niedrigeren Niveau stabilisiert, wenn die Menschen aufhören zu sparen. Aber nichts passiert, um den Konsum anzuregen und damit eine Erholung zu fördern. Nur ausgebildete Ökonomen kommen auf die verrückte Idee, dass der Weg in den Wirtschaftsaufschwung darin besteht, dass alle die Ausgaben kürzen.

Vertrauen und Geldhaltung

Keynes‘ zweites Argument gegen die Idee der v-förmigen Erholung hatte mit der Geldhaltung zu tun. Es ist charakteristisch für eine Krise, dass Unternehmen ihr Geld horten bzw. ihre Barreserven aufstocken, statt zu investieren. Je größer diese „Liquiditätspräferenz“, desto höher ist der Zinssatz, den die Kreditgeber verlangen. Um die Produktion anzukurbeln, brauchen Kreditnehmer aber niedrigere, nicht höhere Zinsen. Wenn also das Vertrauen gering ist, bedeuten die höheren Zinssätze, die z. B. von den Banken verlangt werden, noch weniger Investitionen, weniger Konsum und weniger Beschäftigung.

So führen flexible Löhne und unflexible Zinssätze zu einer Vertiefung des Einbruchs. Anders als bei Robert Lucas bleibt die Wirtschaft ohne staatliche „Stimulierung“ in der Rezession. Aber die Mainstream-Ökonomik erlebt ein Comeback: Depressionen oder tiefe Rezessionen sind sehr seltene Ereignisse, wie die „schwarzen Schwäne“ von Nassim Taleb (2008). Es wäre absurd, das Wirtschaftsleben so zu organisieren, als stünde der nächste Einbruch unmittelbar bevor. Marktwirtschaften würden eine innere Stabilität aufweisen, sodass Krisen sehr seltene Ereignisse wären. Das hat Keynes jedoch bestritten: Schwarze Schwäne können jederzeit aus dem Nichts auftauchen.

Der Grund dafür ist laut Keynes, dass die Theorie der „sich selbst ausgleichenden“ Marktwirtschaft von der Vorstellung abhängt, dass jeder, und insbesondere Investoren die Zukunft genau vorhersagen können. Wenn sie den Wert der Vermögenswerte, die sie heute kaufen, in zehn Jahren genau berechnen könnten, würden sie niemals Dinge zu falschen Preisen kaufen. Wie Keynes (1937) schrieb: „The calculus of probability … was supposed to be capable of reducing uncertainty to the same calculable status as that of certainty itself.“ Aber das ist ein Mythos. „Actually, however, we have, as a rule, only the vaguest idea of any but the most direct consequences of our acts“ (Keynes, 1936). Dies ist ein zweiter Paradigmenwechsel, der vielen Ökonomen die Augen öffnete. Dies hatte erhebliche Konsequenzen. Weil die Zukunft ungewiss ist, werden private Investitionen – die von der Erwartung künftiger Erträge abhängen – unstetig sein. Der Wohlstand hängt von den „animal spirits“ der Menschen ab. Wenn sie sich zuversichtlich fühlen, stellen sie mehr Arbeiter ein; wenn sie pessimistisch sind, stellen sie weniger ein.


Aus dieser Darstellung des Marktverhaltens ergeben sich zwei Schlussfolgerungen: Erstens, Zusammenbrüche sind immer möglich, weil die Zukunft ungewiss ist; und zweitens, wenn sie geschehen, gibt es keine „automatischen“ Marktmechanismen, die einen schnellen Aufschwung gewährleisten. Deshalb muss der Staat als „Ausgleichsmechanismus“ in der Marktwirtschaft wirken. Er steigert oder senkt die Nachfrage je nach Bedarf.

Diese zwei Dinge sollten Regierungen tun, und zwar nicht nur im Notfall, sondern dauerhaft:

  1. Sie sollten die Investitionen stabilisieren. Dies können sie durch öffentliche Investitionsprogramme erreichen. Keynes (1936) schrieb: „I expect to see the state, which is in a position to [take] long views … taking an ever greater responsibility for directly organising investment.“ Dies geschah in den 25 Jahren nach dem Zweiten Weltkrieg, doch seit den 1980er Jahren ist der Anteil des Staates an den Gesamtinvestitionen drastisch zurückgegangen, was die Instabilität der Investitionen erhöht.
  2. Die Regierungen sollten eine „antizyklische“ Politik verfolgen, um die Wirkung weiterer Schwankungen zu begrenzen. Das bedeutet, die Wirtschaft mit zusätzlichen Staatsausgaben anzukurbeln, wenn die privaten Ausgaben sinken, und sie zu drosseln, wenn diese steigen. Dies kann auf der Einnahmen- oder auf der Ausgabenseite oder auf beiden Seiten geschehen. Der „Multiplikator“, der auf der „marginalen Konsumneigung“ basiert, zeigt den Regierungen, welchen Gesamteffekt die zusätzliche oder reduzierte Nachfrage auf die Wirtschaft haben wird.

Diese beiden ausgleichenden Funktionen, öffentliche Investitionen und antizyklische Politik, sind notwendig, um Vollbeschäftigung und Stabilität in kapitalistischen Marktwirtschaften zu gewährleisten. Und je mehr Ressourcen kontinuierlich genutzt wurden, desto höher ist die Wachstumsrate und desto größer die soziale Zufriedenheit. Dies war – kurz zusammengefasst – die Botschaft von Keynes.


Lassen Sie uns nun die wesentlichen Einwände gegen die keynesianische Theorie und Politik betrachten. Der erste ist, wie wir gesehen haben, dass Mainstream-Ökonomen glauben, dass Marktwirtschaften eine natürliche Stabilität aufweisen, anders als es Keynes annahm. Aber es gibt auch Argumente gegen einzelne keynesianische Instrumente.

  1. Anti-keynesianische Ökonomen lehren, dass öffentliche Investitionen weniger effizient sind als private. Sie verdrängen (crowd out) sogar private Investitionen. Dies trifft zu, wenn alle Ressourcen der Wirtschaft voll ausgeschöpft werden. Wenn jedoch freie Kapazitäten vorhanden sind, können öffentliche Investitionen private Investitionen steigern (crowd in), indem sie die Gesamtnachfrage nach Gütern und Dienstleistungen erhöhen. Die meisten Regierungen haben die öffentlichen Investitionen nach den 1970er Jahren drastisch gekürzt. Das Wachstum wurde halbiert und die Arbeitslosigkeit stieg an. Tatsächlich wird ein Teil der öffentlichen Investitionen nicht effizient eingesetzt, aber das sollte mit der Ineffizienz von Arbeitslosigkeit abgewogen werden.
  2. Monetaristische Ökonomen – Nachfahren von Milton Friedman – behaupten, dass die keynesianische „antizyklische“ Politik zwangsläufig inflationär sein muss. Regierungen können den Konjunkturzyklus nicht steuern; und selbst wenn sie es könnten, würden sie im Bemühen Wählerstimmen zu gewinnen, so viel Geld drucken, dass es zu einer schleichenden und schließlich beschleunigten Inflation führen würde.

Diese monetaristische Kritik ist teilweise berechtigt. Aber auch hier müssen wir das keynesianische System mit der monetaristischen Alternative vergleichen. Monetaristen behaupten, dass die Märkte „antizyklisch stabil“ seien, wenn es keine „Schocks“ gäbe, da die Menschen rational in die Zukunft vorausschauen können. Der wichtigste „Schock“, gegen den Vorkehrungen getroffen werden müssen, sind unerwartete Änderungen des Preisniveaus. Diese können die Menschen dazu verleiten, zu falschen Preisen zu handeln. Der Schlüssel zur wirtschaftlichen Stabilität ist daher eine niedrige und konstante Inflationsrate. Dies macht es erforderlich, dass die Kontrolle der Geldmenge oder der Zinssätze aus der Verantwortung der Politiker genommen und unabhängigen Zentralbanken übertragen wird. Dieses System wurde in den 2000er Jahren in den meisten Ländern getestet. Es hat 2008 bis 2009 einen wirtschaftlichen Zusammenbruch nicht verhindert.

Selbst die Politik der quantitativen Lockerung – die Überschwemmung der Wirtschaft mit Zentralbankgeld oder M0 in den Jahren 2009 bis 2012 – führte nach dem Zusammenbruch nicht zu einer v-förmigen Erholung. Der Trugschluss der Monetaristen besteht darin, dass die Geldmenge (zu der die erweiterte Geldmenge oder Bankkredite gehören) nicht direkt unter der Kontrolle der Zentralbank steht. Wie viel Bankkredit eine Ausweitung der Geldbasis bewirkt, hängt von Keynes‘ „animal spirits“ ab. Ein sehr hoher Zinssatz kann einen Boom beenden, aber selbst ein negativer Realzinssatz führt möglicherweise nicht zu einer Erholung, wenn die „animal spirits“ sich verdunkeln.


Die Antwort auf das Scheitern sowohl des altmodischen Keynesianismus als auch des neumodischen Monetarismus besteht nicht darin, die ausgleichende Rolle des Staates aufzugeben, sondern sie so automatisch wie möglich zu gestalten. Der Staat sollte sich zu zwei Dingen verpflichten: zu einem öffentlichen Investitionsprogramm und zu einer Arbeitsplatzgarantie im öffentlichen Sektor.

Das erste würde die Investitionsschwankungen enger begrenzen; die zweite würde einen Puffer an Arbeitsplätzen schaffen, der sich in einem Abschwung automatisch ausweiten und in einem Aufschwung reduzieren würde. Öffentliche Investitionen bedeuten nicht zwingend öffentliches Eigentum. Ein Teil davon könnte durch quasi-staatliche Institutionen wie öffentliche Investitionsbanken oder Unternehmen mit staatlicher Beteiligung getragen werden. Diese würden unter einem weit gefassten zentralstaatlichen Mandat stehen und damit nationale Ziele widerspiegeln, aber unternehmerische von politischen Entscheidungen trennen. Die öffentliche Arbeitsplatzgarantie würde zentral finanziert, aber mit Projekten, die lokal ausgewählt und verwaltet werden. Das Ergebnis beider Politiken gemeinsam wäre, dass zum ersten Mal seit der industriellen Revolution unerwünschte Arbeitslosigkeit abgeschafft würde.

Marxisten würden behaupten, dass ein solches aktualisiertes keynesianisches Programm nur ein Wunschtraum ist. Eine kapitalistische Wirtschaft braucht eine „Reservearmee der Arbeitslosen“, um die Profite zu erhöhen und die Löhne zu senken. Nur eine vollständig sozialisierte Wirtschaft, so sagen sie, kann die Arbeitslosigkeit abschaffen und das Lohnwachstum aufrechterhalten. Tatsächlich wiesen die keynesianisch geführten kapitalistischen Volkswirtschaften von 1950 bis 1975 eine durchschnittliche Arbeitslosenquote von 2 % bis 3 % auf, halb so hoch wie seither, mit steigenden statt stagnierenden Löhnen, und die Inflation war nur geringfügig höher als während monetaristischer Führung.

Kein System der politischen Ökonomie ist vollkommen. Aber es sollte nicht im Vergleich mit einem idealen System beurteilt werden, sondern mit den realen Alternativen. Keynes machte sich daran, die Demokratie vor den beiden Herausforderern seiner Zeit – Faschismus und Kommunismus – zu retten. Er sagte, wenn wir angesichts der Massenarbeitslosigkeit mit der Laissez-faire-Politik fortfahren würden, würde die politische Freiheit nicht überleben. Wird das Problem aber richtig analysiert, könnte es möglich sein, die Krankheit zu heilen und gleichzeitig Effizienz und Freiheit zu bewahren.

Diese Überlegungen sind auch heute aktuell. Ich bezweifle, dass die westliche Bevölkerung über längere Zeit eine politische Ökonomie tolerieren wird, die dauerhafte Arbeitslosigkeit, häufige ökonomische Abstürze, stagnierende Löhne und extreme Ungleichheiten bei Vermögen und Einkommen mit sich bringt. Der Keynesianismus löst nicht alle wirtschaftlichen Probleme. Keynes (1936) schrieb, die beiden großen Fehler der kapitalistischen Gesellschaften seien das Versagen, Vollbeschäftigung zu schaffen, und seine arbiträre und ungleiche Verteilung von Einkommen und Vermögen. Er machte sich daran, den ersten Fehler zu überwinden, was das große Problem der damaligen Zeit war. Diese beiden Therapien mit dem Green New Deal zu verbinden, bleibt die größte wirtschaftliche Herausforderung unserer Zeit.


Keynes, J. M. (1936), The General Theory of Employment, Interest and Money, Macmillian.

Keynes, J. M. (1937), The General Theory of Employment, The Quarterly Journal of Economics, 51, 212-223.

Pigou, A. C. (1933), The Theory of Unemployment, Macmillian.

Taleb, N. (2008), Der schwarze Schwan: Die Macht höchst unwahrscheinlicher Ereignisse, Hanser.

Joseph Schumpeter

The theorist of “creative destruction,” one of the greatest economists of the 20th century, was no stranger to violent disruption in his personal life, as a new biography reveals

Joseph Alois Schumpeter (1883-1950) was one of the greatest economists of the 20th century—commonly bracketed with such giants as Keynes, Hayek and Friedman. He is best known for his theory of “creative destruction”—the view that the capitalist system progresses by constantly revolutionising its economic structure. New firms, new products, new technologies continually replace old ones. Since innovation comes in fits and starts, the capitalist economy is naturally, and healthily, subject to cycles of boom and bust. The agent of this revolutionary process is the heroic entrepreneur: the individual owner in the 19th century, big business in the 20th. Innovation needs its reward, hence a dynamic economy is one which allows the innovator huge profits. Temporary monopoly is nature’s way of allowing innovators to gain from their inventions. Short-run inequity is the price of long-run progress.

Along with Schumpeter’s positive contribution went a persisting critique of conventional economics, whose concern with static problems of allocation in perfectly competitive markets rules out change and the role of the entrepreneur. But Schumpeter’s speculations ranged far beyond this, into the question of the durability of a civilisation which lives by continually destroying what it has created—a line of thought which went back to Marx in his Communist Manifesto. It may well be that Schumpeter has more to tell us about the nature of capitalism than the new breed of market idealists spawned by globalisation or by such 20th-century apostles of stabilisation as Keynes.

At least, that is the argument of Thomas K McCraw in Prophet of Innovation, his new biography of the great Austrian economist. It is a fine book, well paced and readable. There are plenty of good photographs, of Schumpeter himself and of the important people and places in his life. The theme of creative destruction appears against the background of Schumpeter’s own family uprooting, the dissolution of the Austro-Hungarian empire, the turmoil of the interwar years, and the restless, and tragic, circumstances of his adult personal life. McCraw puts it like this: “Over the years he reinvented himself many times…Thinking not of where he started but of how he might move forward, he was well suited to grasp the mindset of the entrepreneur… [In Vienna] he learned that one’s identity in a rapidly changing world might come more from innovation than inheritance; that exchanging security for opportunity could bring great rewards; and that for someone with his gifts almost anything was possible.”

A thinker’s background cannot tell us everything about his thought, but it can tell us a great deal, and McCraw exploits his opportunities with great skill, while also giving the reader a lucid, non-technical account of Schumpeter’s ideas. His main insight concerns the effect on Schumpeter’s thinking of the impact of capitalist business on the still largely feudal order of central and eastern Europe. It was the speed of the transformation, and extent of the ensuing dislocation, which led him to reject the static equilibrium models of British economics, derived from a society where economic change was evolutionary and institutions very stable. Unlike his exact contemporary Keynes, Schumpeter always saw economics from the standpoint of the innovative businessman, not of the treasury or central bank.

One of McCraw’s failings is that he does not give a sufficiently concrete account of Schumpeter’s first 30 years. He bursts on the intellectual scene already a celebrity. The steps by which he reached his eminence are largely missing. Unlike Keynes, who never strayed far from Cambridge, Schumpeter was uprooted from his ancestral home. His family origins were solid Catholic German bourgeoisie, long settled in a couple of small towns in Moravia, now part of the Czech Republic. But when he was four, his father, who owned a textile business, died in a hunting accident. His mother Johanna, determined to secure a larger stage for herself and her son, moved to the provincial capital Graz, remarried a general, and, with her elderly aristocratic husband, shifted to Vienna where the 11-year-old Schumpeter was enrolled in a top gymnasium, Theresianum, proceeding from there to the University of Vienna, where he graduated in Roman and canonical law in 1906.

This double transplantation cost Schumpeter his roots, but fed his ambition. Johanna was one of those mothers who invested all her energies in the creation of a star. Schumpeter shared his mother’s ambition for him to succeed socially as well as intellectually. Outside the study, Schumpeter was an almost invented character. He started mixing with Austria’s aristocracy—as a young man he even fought a duel. He became a compelling conversationalist. He impressed old professors and dazzled young students, but he had no close male friends of his own age. The hour in the morning Keynes devoted to his investments, Schumpeter was reputed to spend on his toilette. “The new graduate,” McCraw writes, “dressed like a dandy, spent money freely, and carried on frequent liaisons with willing women.” He used to say that his three ambitions were to become the greatest economist, the greatest horseman and the greatest lover in the world, and only the decline of the cavalry had thwarted the fulfilment of all three.

McCraw could have made more of the mystery of Schumpeter’s appearance. It had more of the Levant than of Europe. Many people assumed he was Jewish, but there is no evidence of this, nor, as McCraw rightly emphasises, of any expressions of antisemitism. But Schumpeter made his strange looks a compelling feature of his personality. “He held his head high and tilted slightly backward, acccentuating his prominent chin and making his 5’8′ 145-pound frame look a little bigger than it was.”

Schumpeter possessed a prodigious capacity for work, but one would like to know more about his work habits and what he worked on. There is nothing about his eight years at Theresianum except that he emerged fluent in six languages. At the University of Vienna “it did not take Schumpeter long to find that he had a special gift for economics,” but apart from a single reference to his attendance at Bohm-Bawerk’s seminar on Marx, we learn little about what he actually studied, or the quality of his degree. He had no “special gift” for mathematics—but how much maths could he do? Two years after his graduation—aged 25—he published a 600-page book on economic method, and three years later a slenderer volume, The Theory of Economic Development (1911), which “launched his rise to stardom” from a temporary teaching job in a provincial Austrian university. On a visit to England in 1907, which confirmed a lifelong Anglophilia, the great lover unexpectedly acquired a well-connected English wife, Gladys Seaver, 12 years older than himself, with whom he was not “madly” in love. “Perhaps,” McCraw speculates not unreasonably, “it was again an issue of identity, of trying to reinvent himself as a continental aristocrat and an English gentleman.”

The Theory of Economic Development is Schumpeter’s first statement of the crucial role that entrepreneurs play in breaking up old and creating new structures and stimulating new wants, and the role of bank credit in financing innovation—themes he was to pursue for the rest of his life. It also established what was to become the main line of his defence of capitalism—that its destructiveness was inseparable from its creativity. Schumpeter was not a complete non-interventionist like his fellow members of the Austrian school, Ludwig Mises and Friedrich Hayek, but he was to come out decisively against the systematic stabilisation policy recommended by Keynes for fear it would end progress prematurely.

A surprising omission in McCraw’s account is any discussion of Schumpeter’s little book, Imperialism and Social Classes (1919), which tried to explain the the collapse of the Austro-Hungarian empire after the first world war. Bourgeois societies, Schumpeter argued, are by nature peaceful, but German and Austro-Hungarian politics had been dominated by a military aristocracy: “a machine of warriors, created by the wars that required it, which now creates the wars it requires.” Like Keynes, Schumpeter had vainly advocated a negotiated peace to save the European civilisation he loved. In 1919, he briefly became minister of finance in the rump Austrian state, but his stabilisation plan was powerless against hyperinflation. Here again McCraw lets down the reader: he tells us that Schumpeter’s ministerial career lasted six months, but nothing about how it ended.

Two devastating blows in short succession brought a “belated onset of… maturity.” His attempt to make money as a banker foundered in 1924 with the collapse of a bogus glassmaking company whose loans he had guaranteed. An adverse legal judgment, while exonerating him from wrongdoing, left him debts which took years to pay off and a blemished reputation. He wrote: “The promises of wealth and the threats of destitution that [capitalism] holds out, it redeems with ruthless promptitude.” Meanwhile, Schumpeter had fallen desperately in love with Annie Reisinger, 20 years his junior, the beautiful daughter of the concierge of the apartment building in which he had grown up. Inventing a middle-class background for her, and ignoring the inconvenient fact that he was still married to Gladys Seaver, Schumpeter rushed her to the altar in November 1925. A few months later came the death of his adored mother and, in August 1926, of Annie herself in childbirth. Schumpeter never fully recovered from this shattering of his hopes for wealth and personal happiness. “Everything now hangs on my ability to work,” he wrote to a friend. “If so, the engine will keep running, even if my personal life is over.” His celebrity lectures would pay off his debts; his serious work would be monuments to his Hasen—his mother and Annie.

The rest of his life was devoted to teaching, thinking and writing. He moved from a chair in Bonn in 1925 to one at Harvard in 1932, where he remained till his death in 1950. On the way, he acquired two devoted helpmates, Mia Stöckel, who managed his personal business in Bonn, and Elizabeth Boody, whom he married in 1937. At Harvard, he became a campus celebrity, holding court each afternoon in a coffee shop by the Widener Library. He was devoted to his students, and generous with his attention. Although Schumpeter insisted that “scientific” work must be kept free from the policy taint, he could not avoid politics completely in the 1930s and 1940s. Elizabeth had a soft spot for Japan, and Joseph regarded Soviet Russia as a greater danger than Nazi Germany—views which brought the couple to the attention of the FBI in the war.

McCraw provides excellent accounts of the three big books Schumpeter wrote at Harvard—Business Cycles (1939), Capitalism, Socialism and Democracy (1942) and his superb History of Economic Analysis, published after his death in 1954. Capitalism, Socialism, and Democracy sums up most of what Schumpeter had been thinking for the previous 30 years. It was also one of the most influential books of the 20th century. It transferred the defence of capitalism from the ground of the superiority of markets over central planning to that of the superiority of capitalism over socialism as an engine of technological progress, but one inseparable from huge costs in terms of disruption and inequity, and because of that, inherently fragile. Capitalism’s fatal flaw is exactly what Marx discerned in the Communist Manifesto: it creates a vested interest in social unrest by undermining the traditional ruling class without being able to create a ruling class of its own. To his own question “Can capitalism survive?” Schumpeter answered “No, I do not think that it can.” As JK Galbraith remarked, “Men of property and high corporate position do not rally to such friends.”

Unlike Hayek, Schumpeter defends the theoretic viability of socialism, but argues that the conditions of its arrival (except possibly in Britain) will be such as to make it intolerably oppressive. McCraw rightly points out the irony in Schumpeter’s treatment of socialism—which led some reviewers to believe that he was advocating it—but somehow misses the tragic implications of the thesis: capitalist civilisation is doomed, but its alternative, socialism, is appalling. He also, it seems to me, underestimates the huge importance Schumpeter’s discussion of democracy has had on the development of modern political science, particularly in the two propositions that politicians are entrepreneurs in votes, and that the true function of democracy is to choose leaders, not policies. What Schumpeter was arguing was that elitist democracy, or oligarchy, could give societies the advantages of dictatorship plus liberty. He saw Britain as the epitome of such a system. But in general he doubted the ability of contemporary democracies to exercise the required self-restraint.

Schumpeter was one of the dazzling minds of the 20th century, but was he a great economist? Unlike Smith, Ricardo and Keynes, he created no new theory, founded no new school. At Harvard, he taught many brilliant graduate students, some of them future Nobel laureates, but they went to his seminars more to dispute than to learn. He could certainly “do” economics, and indeed his erudition in the history of the discipline was unparalleled, but he viewed it largely from outside—that is, sociologically and historically. His major contributions to our understanding of the capitalist system stand outside the main development of the discipline, which has been towards increasing mathematical precision in stating the conditions for market equilibrium. As McGraw rightly emphasises, entrepreneurship can’t be fitted into formal models; we can’t predict the future because we can’t predict the appearance of exceptional individuals. Or as Schumpeter himself wrote: “We do not know enough in order to form valid generalisations or even enough to be sure whether there are any generalisations to form.”

Given the magnitude of Schumpeter’s achievement outside economics, this reader is left with a question: does economics, as taught and practised in the economics departments of top universities and published in top journals, rather than as Schumpeter understood it, have anything of importance to tell us about the conditions of contemporary economic and political life? Or is it, like the glass-bead game in Herman Hesse’s novel Magister Ludi, a kind of intellectual chess played by an elite of secular priests?

Letter: Remember Kissinger’s advice to the Ukrainians

Nato governments have rightly said they are willing to address Russia’s security concerns, but then say in the same breath that Russia has no legitimate security concerns because Nato is a purely defensive alliance. Whether we like it or not, a Nato that now borders Russia and could in future border even more of Russia is seen by Russia as a security concern.

In 2014 Henry Kissinger wrote in the Washington Post that “internationally [Ukraine] should pursue a posture comparable to that of Finland. That nation leaves no doubt about its fierce independence, co-operates with the west in most fields, but carefully avoids institutional hostility to Russia.”

A permanent “Finlandisation” of Ukraine would be unrealistic. But it should be possible for Nato, in close association with Ukraine, to put forward detailed proposals to negotiate a new treaty with Russia that engenders no institutional hostility. This would cover: the verifiable withdrawal of nuclear-capable missiles; detailed military confidence-building measures limiting numbers and demarcating deployment; and international agreement on presently contested borders between Russia and Ukraine.

Lord Owen
UK Foreign Secretary 1977-79

Lord Skidelsky
Historian, Fellow of British Academy

Sir Anthony Brenton
British Ambassador to Russia 2004-08

Christopher Granville
Former British Diplomat

Nina Krushcheva
Professor of International Affairs, The New School, New York, US

Letter in response to this letter:

Sovereignty also means freedom to change policy / From Helge Vindenes, Former Norwegian Diplomat (1958-1999), Padstow, Cornwall, UK

Macro Economics, End of Work Climate Change

Robert Skidelsky is emeritus professor of political economy at Warwick University. His numerous, award-winning books include Keynes: The Return of the Master (2010), a discussion of John Maynard Keynes and the urgent relevance of his ideas in the wake of the 2008 financial crisis, and How Much is Enough? The Love of Money and the Case for the Good Life (2012), co-written with his son Edward Skidelsky. A member of the House of Lords since 1991, Skidelsky was elected a Fellow of the British Academy in 1994. His most recent book is Money and Government (2018) in which he argues against the orthodoxy of small-state neoclassical economics in favour of Keynes’ “big idea”.

Interview by Masoud Golsorkhi

Masoud Golsorkhi You say in the preface to Money and Government that the whole of macroeconomics is up for grabs in view of the poor recovery after the 2008 crash, yet throughout, you draw a picture of economics as being gripped by ideology. In response to the pandemic the government has shown it is prepared to ignore its own best advice. Do you feel vindicated? Do you feel Keynes is vindicated?
Robert Skidelsky I think so, but it all depends how deep the conversion is. If it’s just thought of as an emergency and that life will return to normal pretty quickly, then the chances are that we’ll try and get back to what was there before. If, on the other hand, economists start realising that there is a chronic condition in the capitalist system of today and it’s not just an emergency, then I think there’s some chance that the state will re-emerge as a major player in the management of economies. They’ll start rethinking the role of independent central banks as the only agents of stabilisation. They’ll start thinking more about inequality and the role it plays.

MG Do you suspect that we will have to bring the deficit back down again?
RS The deficit is one of those hugely irrational and irrelevant things that people talk about. The deficit depends on the state of the economy. If you have a programme that can bring the economy back to health, then the deficit will automatically come down. If, on the other hand, you say the deficit is important in itself and start cutting it, then you’re cutting the economy at the same time. The deficit is supporting the economy; if you cut it, you’re removing one of the economy’s main supports. So just to concentrate on the deficit is to put the cart before the horse. That was the mistake they made really in 2009 and 2010 – they prematurely started cutting the deficit in Britain and in the United States as well, and as a result, the recovery was seriously incomplete.

MG Do you think they’ve learned their lesson?
RS No, but there’s more weight behind the kind of things I’m saying now than there was in 2008 and 2009, because we’ve had two shocks. The first shock was endogenous to the economy; it was the shock to the financial system. The shock of the pandemic is external, but the effects have been fairly similar. More and more economists are saying, we must redo the economics profession. Paul Krugman in his latest book says this, and [Joseph] Stiglitz has been saying it. People who have been called heterodox like me now feel a bit more mainstream because so much has gone wrong with the new Keynesian-neoclassical synthesis.

MG Overall, do you think that the imbalance between the creditor and the debtor class, which is a political question, is likely to be addressed in the UK and elsewhere?
RS It’s being addressed a bit. What you’re doing is asking one of the oldest questions in economic life: who is mainly responsible for paying the debt? Who is responsible for incurring the debt and who’s responsible for paying it back? The orthodoxy is that you get into debt through voluntary decision, through over-optimism or just plain profligacy, and it’s your duty to pay it back. If you can’t pay it back, traditionally, you went to prison. They don’t do that now, but I think it’s a big issue because the other side is why do you make loans to people who are not creditworthy? This arose,
of course, in the subprime crisis. There was a whole lot of bad loans being taken out by people at teaser rates, which then went up – all because financial institutions saw that they could make a profit. So there’s always a tendency to overlend. On the other side, we live in a culture where you must have everything you want now, so there’s a tendency to get into debt. Getting into debt isn’t just a matter of greed on the part of the debtor however; it’s also often a matter of necessity. When you have such a huge quantity of poor people in our kind of society, in the UK and elsewhere, then of course, they actually need to get into debt in order to survive. Then they’re saddled with a debt they can’t repay. It’s a larger question than just creditors and debtors; it’s about the distribution of income and wealth within the society.

MG Would you be able to explain one of the problems that potentially awaits us after this period, namely, stagflation? How did it come about at the end of the golden years between 1950 and 1975? Can it happen again?
RS Towards the end of the “golden period”, governments were trying to maintain full employment, which led to inflation. Governments weren’t the only cause of this inflation; there were also very, very powerful unions that felt they were secure because the government would never give up on them. So you had an inflationary tendency and periodic attempts to curb it, which would lead to rises in unemployment. The recoveries that followed would then show a greater increase in inflation than in employment. The result was called the “misery index” with simultaneous rises in inflation and unemployment. That’s when Milton Friedman steps in and says, “Well, the explanation of this situation is that governments are printing too much money and trying to keep unemployment below its natural rate.” Yet that was a very, very partial narrative of what went wrong; it’s ridiculous to say that inflation was simply the result of the government’s attempts to maintain too high a level of employment. What about the Vietnam War? What about the huge, huge inflation that was unleashed globally by the United States in the 1960s? What about supply? What about the quadrupling of the oil prices? There was a combination of factors that would have defeated almost any kind of economic policy at that time. When you have four or five things going wrong simultaneously, it’s very, very hard just to pick out one and say this is the cause of everything that’s gone wrong. You have an interaction of events and the policy becomes extremely difficult. Taking one as the cause of all that went wrong led to monetarism and the abandonment of any attempt to maintain full employment. You ended up with austerity, which did the reverse, and we’ve never really recovered properly from that. We’ve had periods when things haven’t been too bad, but we haven’t recovered properly from it either in terms of a demand for labour or in terms of equality, because those societies were also more equal than ours. The union push wasn’t just a push for full employment; it was an equalising force on income. Now we’ve had automation, but no push to share the fruits of it among the population at large. You have huge profits accruing to a very, very small group of people and an increase in poverty, which is now permanently established.

MG The point that Thomas Piketty makes is that big chunks of capital have vanished from the productive stage of the world economy. Would you agree with that?
RS They have vanished from the productive stage of the world economy, but they haven’t gone to sleep. They have gone into what Keynes called “financial circulation”, which is to say, assets are swapped, which then pushes up their price. One important feature of the capitalist economy as it now operates is the financial bubble. It could be any kind of asset, yet that doesn’t mean that the assets trickle down into the real economy. Some do, but many don’t. They just churn around until they crash. So unless we achieve some new way of stabilising economies at a proper level, we’re going to have more and more of these asset bubbles and their crashes, which could happen anywhere.

MG Is this a symptom of what they call the financialisation of the whole economy?
RS It is what’s called the financialisation of the economy quantitatively. It simply means that the financial sector relative to any other sector is now much larger than it was. That’s defended on the grounds of the services that the financial sector renders the rest of the economy. They like to present themselves as intermediaries that facilitate financial borrowing and lending, saving and investing and make it safer because the more diversified and the more securitised their lending, so it is argued, the less risky for everyone. Of course, all that is not true. I agree very much with something Adair Turner said soon after the last crash: a lot of financial activity is simply social waste. So how do you stop it? The old way was called financial repression and operated in the heyday of the Keynesian system: you would stop the export of capital and put restrictions on its movement. So it was no longer really free to roam the world in search of the largest profit and confined to your own country. Keynes said that the financial system shouldn’t be larger than the political system – that was the principle behind it. We need some new financial repression, but how do you do it? You can do it through taxes of one kind or another. The well-known Tobin tax, for example, named after an economist called James Tobin, taxed short-term financial transactions. In other words, you can make it illegal to hold assets too briefly. There’s also a question of ethics involved and a lot of people want to restore ethical banking. You can also stop bubbles by some sectoral allocation of capital. But remember, the central banks in all countries have been given control of what’s called financial stability. It’s become one of the responsibilities of central banks to maintain financial stability, which wasn’t the case before the crash of 2008 and 2009. Before that they only had a responsibility for inflation because the financial system was assumed to be fairly stable. Now they have a specific responsibility and they’re talking about how best to carry it out. There are all kinds of stress tests. There are lots of things you could do to make banking safer than it now is. Whether these will happen, I don’t know, because the banking lobby is very, very powerful. There’s also the huge question of shadow banking and how its financial institutions can escape the scrutiny of regulators. There are lots of things you could do, but you’ve got to have the political will and support to do them.

MG What do you think about the idea of growth? Keynes didn’t have sight of the melting ice caps, but we do. Is the idea of growth something that we can abandon or reframe like Mariana Mazzucato or Ann Pettifor propose, and can we recondition capitalism to deliver something other than growth?
RS They want green growth by cutting down on one type of growth, but not cutting down on growth itself. The more radical proposition is degrowth. Obviously some countries have to go on growing. They’re very poor and within the so-called abundant economies, they don’t feel that they have reached a stage of abundance. The problem with the notion of abundance is it’s a very macro term, and you always want to ask: abundance for whom? How much is enough? My son and I wrote a book together called How Much is Enough?, which tackles exactly this problem of abundance. How much do you need to lead a good life? And the answer is, of course, that it’s very hard to put a figure on it. First of all, you have to decide what a good life is and once you’ve got an idea of what a good life is or might look like, then you can answer the question of how much material resources you want. If you go back to the classical Greeks, people like Aristotle, they said enough is a sufficiency to enable you to develop fully your capacities, but we’ve become very greedy and we want more and more. And of course, the whole profit-making momentum is designed to feed our desire for more and more and more so that we can never cut it off at any point. That does bring one, as you rightly say, to the planetary limits. We’re simply depleting bit by bit the planet’s capacity to support us, and that has to be tackled. You can’t have a simple growth agenda anymore because you’ve got a supply constraint looming up – it’s as simple as that. ◉

Britain’s Benefit Madness

Work is the ultimate escape from poverty. But the futile sort demanded by the United Kingdom’s income-support scheme puts many of society’s weakest members on a path to nowhere, because it reflects a welfare ideology that fails to distinguish fantasy from reality.

LONDON – Mahatma Gandhi probably never said, “The greatness of a nation can be judged by how it treats its weakest member.” But that doesn’t make it any less true. And nowadays, the United Kingdom is in danger of receiving a failing grade.

According to the Joseph Rowntree Foundation, 14.5 million people, or 22% of the UK’s population of 65 million, live below the “poverty line” (defined as less than 60% of median income). Of a working-age population of 42 million, some 5-6 million, or about 12%, are either unemployed or underemployed (working less than they want to). About eight million working-age citizens, or 20% of the total, qualify for what the British call “benefit,” whereby all or part of their income is paid by the state.

These figures are approximate, and some of the details are disputed. But the broad picture is that, even setting aside COVID-19, the UK’s capitalist system normally cannot provide a living wage for about one-fifth of the country’s working-age population.

This represents a huge change from the late 1940s, when Britain established its redoubtable welfare state. The philosophy that inspired it, reflected in the 1942 Beveridge Report held that the state would guarantee full employment, that work would provide the income for a decent life, and that the welfare system would deal with “interruptions” to work caused by unemployment, sickness, and maternity.

By the 1960s, the interruptions had become much more frequent, not because unemployment had risen, but because the number of claims for so-called national assistance (benefits not covered by insurance) rose faster than the working-age population. The initial growth stemmed largely from an increase in the number of single mothers and an additional entitlement to disability benefits. Later increases in the number of claimants, including in the early 1980s, were fueled by a rise in unemployment and precarious work.

The current situation, with about 20% of the working-age population “living on the state,” has existed since the 1990s. The growing numbers inevitably resulted in the spread of means-testing and conditionality, which, together with demands to simplify an increasingly fragmented system, led to the introduction of the current Universal Credit regime, whose long rollout began back in 2011. The new scheme consolidated six benefits for working-age people, in or out of work, into a single monthly payment.

But the key move had come earlier, in 1995, when the UK’s then-Conservative government replaced the unemployment benefit with a Jobseeker’s Allowance. In contrast to the era of Keynesian full-employment commitments, claimants would receive the allowance in return for undertaking a mandatory “job search,” defined as “work activity.” Every claimant had to prove that they were spending 35 hours a week – the equivalent of a full-time job – looking for work. Failure to engage in the necessary “work activity” would result in their allowance, or “wages,” being docked or cut off.

The philosophy behind this parody of the work contract was clearly explained by Neil Couling, a senior civil servant at the UK’s Department for Work and Pensions (DWP), in his evidence to the House of Lords Select Committee on Economic Affairs in March 2021. “The system does require the 2.5 million people on universal credit to engage with work search as a condition of receiving universal credit,” Couling said. “You have to look for a job if you are going to get a job.”

As the DWP explained, “deliberately mirroring a contract of employment, the claimant commitment makes clear that welfare is no different from work itself.” This means that “just as those in work have obligations to their employer, so too claimants have a responsibility to the taxpayer.”

Pronouncements like this one reveal that insanity – the inability to distinguish fantasy from reality – has taken over a system. It is true that you have to look for a job in order to get one. But you will not find one, even if you search overtime, if there are none available. The fantasy behind the scheme (which also underpins neoclassical economics) is the assumption of full employment, with unemployment being simply a consequence of able-bodied workers’ preference for leisure.

Likewise, the UK’s benefit system assumes, insanely, that all claimants are digitally literate. The moving filmI, Daniel Blake, about an unemployed carpenter who had recently had a heart attack, portrays Blake’s increasingly desperate efforts to submit a benefit claim online. Although his cardiologist has said he is unfit for work, the authorities say he lacks enough “points” to qualify for disability benefits. So, Blake has to apply for a Jobseeker’s Allowance, which means he is forced to attend a CV workshop and be coached to apply for jobs that he is medically unfit to do.

Blake, who is digitally illiterate, goes to a public library to use the computer there. When the librarian tells him to “run the mouse up the screen,” he takes the mouse and moves it across the monitor.

He then writes a CV by hand and gives it to various employers, who tell him that there is no work to be had. But the officials at the Jobseeker’s Allowance office are unimpressed. “That’s not good enough, Mr. Blake – how do I know you’ve actually been in contact with all these employers?” says one. “Prove it.” This is pure Kafka, the algorithmic grinding of a senseless machine.

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There is of course a method in the madness: Universal Credit can be seen as a deliberate tool to shape a currently redundant segment of the workforce into the forms required by low-skilled labor markets. But the disease is misdiagnosed: the problem is aggregate under-demand for labor, not a surplus supply of the wrong kind of labor.

The only escape from such a system is to replace fantasy with reality. If the UK’s private sector cannot in normal times provide decently paid jobs for all those willing and able to work, the state should step in with a public-sector job guarantee. That would immediately halve the number of Universal Credit claimants “searching for work” and, by eliminating Marx’s “reserve army of the unemployed,” substitute upward for downward pressure on wages.

Community-provided work, however dire, is more rewarding than a soul-destroying slog from firm to firm in search of nonexistent jobs. Work is the ultimate escape from poverty, but the futile sort demanded by the UK’s benefit contract puts many of society’s weakest members on a path to nowhere.

Sequencing the Post-COVID Recovery

As countries emerge from the COVID-19 pandemic, John Maynard Keynes’s emphasis on the need to implement post-crisis economic policies in the right order is highly relevant. But sustainability considerations mean that the distinction between recovery and reform is less clear cut than it seemed in the 1930s.

LONDON – John Maynard Keynes was a staunch champion of US President Franklin D. Roosevelt’s New Deal. The road to a civilized future, he wrote, went through Washington, not Moscow – a direct rejoinder to those idealists, including some of his students, who put their faith in communism.

But Keynes was not uncritical of FDR. Specifically, he faulted Roosevelt for mixing up recovery and reform. Recovery from the slump was the first priority; social reforms, “even wise and necessary,” might impede recovery by destroying business confidence. Presaging today’s debates about post-pandemic economic-policy priorities, Keynes argued that proper sequencing would be the key to the New Deal’s success.

The advisers in FDR’s “brain trust” were reformers, not Keynesians, and had a different view. Attributing the Great Depression to excessive corporate power, they thought that the route to recovery lay in institutional change. As a result, so-called Keynesian stimulus was a minor component of the New Deal – emergency treatment pending longer-run cures.

Keynes himself repeatedly argued that the New Deal’s extra federal spending was insufficient to bring about full recovery. FDR’s total stimulus package of $42 billion – mostly spent in the first three years of his presidency, from 1933-35 – amounted to about 5-6% of US GDP at the time. Keynes, taking a rosy view of the fiscal multiplier, thought it should be double that.

The Nobel laureate economist Paul Krugman said much the same about President Barack Obama’s 2009 stimulus of $787 billion, which came to 5.5% of GDP. On the basis of such uncertain reckonings, President Joe Biden’s $1.9 trillion economic rescue plan, equivalent to 9% of current GDP, seems about right.

Keynes was talking about fiscal stimulus. He was famously skeptical of the monetary stimulus attempted by both President Herbert Hoover in 1932 and FDR in 1933 – now called “unconventional monetary measures,” or, more simply, quantitative easing (QE). Then, like now, the goal was to bring about a recovery of prices by printing money.

The most controversial of these schemes, Roosevelt’s gold-buying spree, was designed to offset the collapse in commodity prices. As FDR explained in one of his famous fireside chats, higher hog prices meant higher farm wages and buying power. In fact, large-scale gold buying by the US Treasury and the Reconstruction Finance Administration failed to move the price of hogs or anything else.

Keynes’s reaction was scathing. Rising prices are an effect of recovery, not a cause of it, he argued, adding that trying to raise output by increasing the quantity of money was like “trying to get fat by buying a larger belt.” All that FDR’s gold-buying program did was to replace gold hoarding with currency hoarding. And yet economists continually reinvent the wrong wheel. The 2009-16 QE programs embodied the same misguided theory and similarly failed to boost the price level.

Likewise, Keynes criticized those provisions of FDR’s National Recovery Administration that tried to engineer recovery by strengthening the position of labor. This, too, he thought, was the wrong way round: the time to saddle business with extra costs was after recovery was secure, not before. And while Keynes never challenged FDR’s promise to drive the money changers out of the temple, he must have wondered about how this would affect the confidence of a paralyzed financial system.

Finally, Keynes worried that mixing up recovery and reform was giving FDR’s administration “too much to think about all at once.” This observation should serve as a warning to those who see in an economic crisis the chance to push all their favorite schemes, regardless of temporal consistency.

Keynes’s stress on the importance of proper policy sequencing is highly relevant today. But, as we emerge from the COVID-19 pandemic, the distinction between recovery and reform – and consequently between macro and micro policy and the short and long run – is less clear cut than it seemed to Keynes (and others) in the 1930s.

For starters, full-employment policy is now obviously linked to employability, which was simply not the case in the 1930s. The reason so many people were out of work back then was not that they lacked the skills required by industry, but rather that aggregate demand was insufficient.

Keynes thus wrote in December 1934 that the purpose of the government spending a “small sum of money” was to get “private individuals and corporations to spend a much larger sum.” What they spent it on was of no further concern to policymakers.

But in today’s age of automation, no government can afford to take such a cavalier attitude to the sustainability of employment. As early as 1930, in fact, Keynes foresaw technological unemployment as a problem that would be outside the scope of demand management.

Since then, the accelerating threat of job redundancy has enlarged what Keynes called the “agenda” of government. In particular, the state must be centrally concerned with the speed of technological innovation, the choice of technologies, and the distribution of the productivity gains that technology enables.

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In the coming years, the uncomplicated Keynesian full-employment policy will need to give way not just to a training guarantee, but also to an income guarantee as the character of work changes and the quantity of necessary human labor falls. Sustainable employment may thus be very different from what we now think of as full employment.

Then there is environmental sustainability. Although Keynes understood that the state would need to account for a much larger share of investment, this was mainly a matter of smoothing out fluctuations in the business cycle, not plotting a sustainable ecological future. (Conferences on nutrition always bored him.) He was too much of a liberal, or perhaps simply too much of his time, to believe that the state’s agenda should include deliberately shaping the future through its choice of investment and consumption projects.

Today, economic reform shadows recovery to a far greater extent than it did when Keynes distinguished between the two. But his way of setting out the relationship is a clear starting point from which to build both better.

Spending Review: Beyond Accountancy

The furlough and the business support schemes, started in March, would end in October to coincide with the reopening of the economy. This meant that the UK economy would be much the same -give and take some minor “scarring”- in 2021 as it was in 2019: a year’s growth lost, but that was the limit of the damage.

The expectation of a fourth quarter bounce-back was always unrealistic: severely damaged economies never “bounce back” unaided. The Chancellor’s response to the “second wave” of infections and lockdowns in October/ November was, in essence, to extend his March 2020 job retention measures until next March. The “V” was becoming more like a “U”, the scarring would be worse, but the assumption seems to have been that very little extra support for businesses and jobs would be needed after March 2021. The £280bn spent :getting the country through COVID-19″ would have been spent; the fiscal task ahead was to start paying it back. Revenue would automatically increase as the economy returned to “normal”, but most the hugely expanded deficit would have to be reduced by raising taxes.

“The expectation of a fourth quarter bounce-back was always unrealistic: severely damaged economies never “bounce back” unaided.

The main realisation underlying the Chancellor’s new spending review yesterday, 25 November, was that this second, less rosy, outcome was not going to happen either. The Office of Budgetary Responsibility (OBR) now forecasts that the UK economy will be 6% smaller, and unemployment twice as large, in 2021 than it was before the pandemic hit. It was therefore necessary to switch tack from waiting for economic life to awaken from its frozen slumber to jolting it back into life by positive action. In addition to the money already spent or pledged, Rishi Sunak has promised an extra £55bn to fund those public services in the front line of the fight against COVID-1, especially the NHS.

More interesting, from the economic point of view, are the pledges around investment in future job creation. Capital spending next year will total £100bn, £27 bn more than in 2019-20; and local authorities will be able to bid for projects to improve what Sunak called “the infrastructure of local life”: a new bypass, upgraded railways stations, less traffic, more libraries, museums, galleries, better high streets and town centres. The Chancellor has also promised a National Infrastructure Bank, headquartered in the North of England, and tasked with working with the private sector from next spring onwards to finance major new investment projects across the UK.

“The government reacted to the pandemic by putting sticking plaster over the temporary wounds it inflicted on the private economy.

All of this represents a considerable revolution in thinking, but without the new language which would make this obvious. The new programmes are tagged onto the old programmes, with bits of extra money for them. This is partly because the Treasury’s thinking is still evolving; partly because a Spending Review is not the place to announce a new relationship between the state and the economy. But this is the logical consequence of the Chancellor’s announcement.

The government reacted to the pandemic by putting sticking plaster over the temporary wounds it inflicted on the private economy. What Sunak’s new measures implied was that, in future, the state is going to play a much more active role in maintaining the patient’s health. The accelerated and expanded capital investment programmes (together with the announcement of a National Infrastructure Bank) amount to a reassertion of the state’s investment function, which had withered away after the Thatcher revolution. The endorsement of local authority job creation schemes, together with the expansion of Kickstart, implies that the state cannot, and will not, in future be indifferent to the scourge of unemployment.

“These are only tentative gropings towards a new economic philosophy.

At the moment these are only tentative gropings towards a new economic philosophy. Thatcherite neoliberalism was all of a piece. It held that provided inflation was avoided, the market system could be expected to produce the best outcomes, in the short-run and the long run. This encompassed a global market; it included indifference to the distribution of wealth and income. In the neo-liberal nirvana, everyone received the “right” rate for the job.

The new philosophy is only half formed. It lacks a language of public responsibility; and it has too many missing paragraphs. Crucially, what should be the role of the financial system, and what measures should be taken to chain it to responsibility? How can a system of national protection be made compatible with market-driven globalisation, which make national prosperity dependent on global supply chains over which no one has any control? What steps can, or should, governments take to prevent cost-cutting automation from destroying jobs, livelihoods, and communities?

These are the questions which leaked out from the accountant’s words of 25 November. They will not go away.

Lord Skidelsky is emeritus professor of Political Economy at Warwick University; and author of a prize-winning biography of the economist John Maynard Keynes.

Why the West failed to contain COVID-19

The promise of a “final” end to lockdowns in the spring of 2021 is the kind of hyperbole we have come to expect about new products and policies. The Oxford University vaccine may work; it may even be delivered effectively. Meanwhile, Covid-19 is still around, the UK government is extending lockdown for large parts of the country and effective protections are still being ignored, at grave cost.

From the start of the pandemic, the policy choice in Europe has been presented as a trade-off between lives and livelihoods. Since priority was (rightly) attached to saving lives, the livelihoods of large sections of the population have been sacrificed, with income support for workers in the form of long paid holidays called furloughs, and loans and grants for business prevented from trading. As a consequence of widespread business distress and associated redundancies, European countries face a huge problem in reopening their economies in the wake of the pandemic. Forecasts suggest that the UK economy will be 6 per cent smaller in 2021 than in 2019, and unemployment at 7.5-8.0 per cent – roughly double its pre-crisis level. 

The experience of East Asia shows the choice in Europe was, and continues to be, wrongly presented. Countries such as China, Japan, South Korea and Taiwan found a way of protecting both lives and livelihoods. Their death rates per head of population have been much lower than in Europe; their economies have barely contracted; and they are forecast to be larger, not smaller, next year. Their secret was an effective system of testing, tracking and quarantining. The question is why such a system was not adopted as the first line of defence in Europe. This is not just a historical question. If it were technically feasible in March it is even more so today. It is still not too late to avoid future economic and social damage, even though most of the damage already inflicted cannot be repaired.


Virologists identify the nature of an epidemic, while epidemiologists study the way it spreads. It was an almost-forgotten English doctor, Ronald Ross, who first developed a predictive model of malaria transmission, which was later generalised as the SIR (Susceptible, Infected and Recovered) model of contagious disease epidemics. His successors concluded that a viral infection ends when the virus runs out of hosts in which it can reproduce itself; that is, when the population develops “herd immunity”.

Central to the SIR model is the “R rate”, the rate of infection. The statisticians work out a data-based prediction of the rate of infection in a susceptible population. Politicians, advised by medical scientists, as well as by health professionals who tell them about medical capacity, and economists who tell them about strains on the economy, decide policy. Their skill lies in assessing political reactions to their policies.

“Mass protection” and “focused protection” have been the two main political responses to the models produced by these experts. They have been presented as polar opposites, but are essentially two variants of the same response.

Think of them in terms of breaking the S⇀ I chain. If a virus is circulating in a susceptible population, the effect of a mass lockdown (semi-isolation) is to reduce the transmission rate and thus the overload of medical services. As soon as the lockdown is eased, the spread rate picks up, but because the susceptible population has been reduced by recovery or death, R continues to decline (with smaller spikes) to the point when normal life can be resumed. The treatment is effective, but the economic cost is horrendous.

The alternative of focused protection, as proposed by the Great Barrington Declaration and others, is a restricted application of mass protection. It aims to remove the most susceptible population (the old and those with underlying health issues) only from the path of the virus. It thus makes possible a more normal life for most people and, in principle, reduces the pandemic’s economic costs. However, the Great Barrington Declaration’s signatories never made clear how a sizeable section of the population can be securely “shielded” from the rest. For this reason, it is supported by very few public health professionals. Sweden has shown that any exponential growth of the virus in a healthy population is bound to spread to the vulnerable. The country’s death rate was similar to that of mass protection countries; and the effects on its economy also similar.

The bird that never flew in most of Europe (Germany was a partial exception) was “targeted protection” based on digital testing, tracking and self-isolating. Such systems exist, and have been rolled out in the UK as well as in other European countries, but never as an alternative to mass or focused protection. Indeed, the UK government decided early in March to stop contact tracing and impose a mass lockdown.  

Digital or targeted protection works not by locking down pre-determined blocks of people but only those individuals and clusters who test positive. Every individual spreader and his or her contact group is isolated straight away. As a result, normal life, with a few sensible precautions (masking, distancing, hand washing) can continue as before. No lockdowns, total or partial, are needed. The South Korean economy contracted by 2.74 per cent between March and September; the UK economy by more than 9 per cent. (Taiwan’s economy actually grew.)

South Korea is the pin-up story for digital protection. Only 289 out of 51 million inhabitants are known to have died from Covid-19 between February and July 2020; in the UK it was 44,600 out of 66 million. South Korea avoided a national lockdown; the UK has had two.

South Korea’s success is generally attributed to early identification and management of cases, clusters and contacts. Every time an individual tests positive in the densely populated country, 100 contacts are identified by location and payment data and then tested. The country has also skilfully controlled its borders (as has Taiwan and China) and it has sensible precautions such as masking and selective social distancing and localised temporary lockdowns. Short of a vaccine, there is no single efficacious system of protection; the difference lies in the weight given by policymakers to the different elements of protection. The national lockdown method is by far the most expensive and, on the evidence, the least efficacious.

Electronic shielding was never central to the European policy response. The reasons are complicated, but essentially due to a mixture of unfamiliar technology, logistics and politics. Consider these in turn.


The technology behind digital shielding is quite simple. It consists of a mobile app on every mobile phone. This is similar to the English NHS Covid-19 app, but without the need for a QR code check-in. 

An effective system works by identifying those users who have been exposed to someone else who has tested positive. The system asks them to be tested within 48 hours and for them to quarantine in the meantime. In a lighter version of the scheme they can be asked if they have symptoms and only then will they have to isolate while they wait to get tested.

An efficient test and track system of this kind would obviate the need for either mass lockdowns or continuous mass testing. It would concentrate on the crucial infection-spreading interactions, allowing optimisation of testing and isolating to those who really are at risk. Thus the rate of transmission is curbed not by locking down whole populations for months or testing everyone, but by briefly quarantining small clusters. You would avoid the ludicrous need to lock down a million people because infection had spread in a cluster of a hundred. The economic effects are incomparably milder.

Such a system was available from the start of the pandemic. But it was never central to stopping the spread of the virus in Europe. Indeed, it was presented as a minor separate measure, subordinate to lockdown. There was no effective lobby for its priority. At no point did those familiar with the technology say to politicians: “Why not make this your main weapon?” Nor did the media take up the cause. Two obstacles seemed insuperable to mass implementation: logistical and political.


To obviate or minimise the need for other measures everybody has to have the app. The scale of roll-out depends on medical capacity to test and track and user capacity to understand what is required of them. Lack of medical capacity seems not to have been the decisive constraint, except in the UK.   

A more important barrier to roll-out was the large fraction of the “digitally challenged” in the population – those who didn’t know how to install the app or who had obsolete telephones. (The same problem is faced when any service is put online.) This is where a big governmental effort was needed and was not forthcoming. The government might have provided free up-to-date phones and free help in setting them up. Along with video tutorials, FAQs and other online resources every technology shop staff could have been trained and subsidised to offer free assistance to the digitally disadvantaged, while ensuring that the app was designed according to user-centred techniques.  

For those with an obsolete mobile phone, who refused to replace it, but still wanted to take part in the test and track scheme, an alternative device such as a digital bracelet or necklace could have been offered to track the users, as have been trialled and deployed in Hong Kong, Bulgaria and Bahrain. Mobile phones or bracelets need to be with the user at all times when outdoors and infringement would need to be pursued by law, just as lockdown rules, mask-wearing and social distancing now are.

Enriching the population technologically in double-quick time would have cost a significant amount of money, though a tiny fraction of the cost of the lockdowns. And it would have offered a valuable opportunity to use the crisis to achieve an enhanced overall level of digital competence, with favourable knock-on effects on people’s employability.

Nor was the technical processing of data quickly the problem it has been made out to be. These are very simple and light data (a few bytes, probably not even kilobytes). The ghastly delays in processing information in the UK, revealed by the Panorama programme “Test and Trace Exposed“, was the result of organisational ineptitude, not technical difficulty.

The central point is that the technology was available from the start and the logistical problem of wiring everyone up and getting up-to-the-minute information could have been solved had attention and resources been directed to solving it. The reason they were not was political.


As European failures have demonstrated, if you opt for digital shielding you can’t be half-pregnant: failing to make sure that everyone follows the rules of the scheme would not be a partial success. It would be a complete failure.

This means two things: authorities need to make sure that the system covers the entire population; second, that every test returning a positive result is synced on to the system, and rapidly processed accordingly. Once this is done, all the new tests performed by the health authority are addressed to the close contacts (as identified above) of those who are positive. The colossal waste of mass lockdown is avoided.

Standing in the way were, and remain, serious concerns about privacy and enforcement.

The following incident in South Korea in May 2020, as reported by the Mail on Sunday, produced national headlines: “Night clubs in Seoul have been linked with 119 coronavirus cases nationwide after a ‘super-spreader’ visited a number of bars in the Itaewon district. [The] 29-year-old man, who is thought to be at the epicentre of the latest cluster of cases, was tracked by authorities… and tested positive for Covid-19.”

It turned out the bars were in the gay district, so, understandably, most of the client names and addresses registered by these clubs and available to the health and law enforcement authorities were false. And the fact that electronic tagging is widely used everywhere for tracing movement of criminals and that CCTV cameras might be used to track people’s movements increases the feeling that Big Brother is watching you.

The charity Privacy International argues persuasively: “Unprecedented levels of surveillance, data exploitation and misinformation are being tested across the world [in the light of Covid-19]. Many of those measures are based on extraordinary powers, only to be used temporarily in emergencies. Others use exemptions in data protection laws to share data. Some may be effective and based on advice from epidemiologists, others will not be. But all of them must be temporary, necessary and proportionate. It is essential to keep track of them. When the pandemic is over, such extraordinary measures must be put to an end and held to account.”

The key question is how to secure the efficient population protection offered by digital shielding while keeping the information it needs anonymous. 

The Italian app Immuni provides the answer. Not only is it not reliant on a centralised database to trace Covid-19, it also does not rely on venue check-ins, preferring closer range Bluetooth connection with other devices. This is far more accurate (in that it drastically reduces the risk of false positives) and grants full anonymity. The system doesn’t need to know my name, nor where the interaction took place. It just knows the date and that the length of the interaction was long enough and the distance was close enough for people to be infected by me. My identity is not disclosed at any step of the process, nor the places I have been. My anonymity will only be breached if someone has to visit me because I have not followed the rule of disclosure. 

It is hard to evaluate the argument that Asian culture is more hospitable than European to tracing because Asians value personal liberty less, and the “public good”, more. Contemporary Europeans associate liberty with privacy, but as Hannah Arendt pointed out in her 1958 book The Human Condition, the right to be protected from the public gaze cannot ever be more than relative.

Enforcement concerns are easily addressed: anybody can opt out of the scheme and embrace the alternative solution in the form of a personal lockdown. The prospect of this would itself be an incentive to become digitally literate.

In our kind of society, people would probably need some financial incentive to join the scheme (such as free up-to-date systems or cash payments). Those who join the scheme but who don’t follow the rules would face fines or policing through phone calls and other checks.

Digital shielding presupposes some degree of scrutiny and enforcement of its rules. But this has to be weighed against the prohibitions of normal life (as well as enforcement of these prohibitions) entailed by mass lockdowns. The lesson of the lockdowns is that the liberty to do what I want requires some regulation of that liberty to ensure it does not harm others.


Angela Merkel said people “needed beds to be full before they would accept a lockdown”. A further implication might be that people had to experience a full lockdown before they would be ready to accept the degree of intrusion involved in digital shielding. This explains why the test, track, isolate scheme has been implemented at best as subsidiary to full or partial lockdowns. This political calculation may have been right for contemporary Europe; it was clearly not so in many Asian countries.

There are certainly legitimate concerns about limiting personal freedoms. It’s only in the light of much stricter limitations, such as those that come with a full lockdown, that one can put things in perspective and see digital shielding as a desirable alternative. In the end, the aim of this solution is to offer an alternative to general lockdown in order to avoid the ascending economic, social and medical costs for the community.

The world economy was hugely damaged; trillions of pounds, dollars and euros were spent protecting communities, and hundreds of thousands of unnecessary deaths have been caused by want of effective deployment of a system of testing, tracing and quarantining. The technical requirements for such a system existed from the start; its effective deployment would have taken some time in Europe, so that the earliest lockdowns were probably inevitable. But by May or June, there should have been no need for further lockdowns. The reason digital shielding was so slow in coming is not technical or epidemiological, but political. With some notable outliers, most European citizens have preferred the anonymity of lockdown to the individual scrutiny of testing and tracing. Given the absolute priority attached to protecting lives, the policy was therefore set. But, despite optimistic claims for a vaccine, Covid-19 is not over. It is not too late to change.

Robert Skidelsky is the author of a three-volume biography of JM Keynes, a crossbench peer and emeritus professor of political economy at the University of Warwick. His most recent book is “Money and Government: The Past and Future of Economics”.

Massimiliano Bolondi is a technology adviser.