The Osborne Ultimatum: The Ideas of Two Dead Economists, David Ricardo and J M Keynes, Are Shaping the Cuts Debate. the Coalition Is in Thrall to the Former's Small-Government Agenda and Says There Is No Alternative-But Its Plans Aren't Working

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

It is hard to get a debate of this kind going in England. At the end of The General Theory of Employment, Interest and Money John Maynard Keynes observes: "Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist." This fits the English (one should say English here, rather than British) view of themselves as people of practical genius, who leave theory to foreigners (forgetting the Scottish Enlightenment). Keynes would have come across many of this sort in public life, uttering common-sense banalities about the need to cut deficits and so forth, oblivious to the source of the banalities. He wanted to force his fellow economists--and, eventually, the wider educated public--to go back to the presuppositions on which their arguments depended, in order to show under what circumstances they might be true or false. He believed in the importance of theory for the making of good economic policy.

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In this, he was only partly successful. Granted, there was a "Keynesian revolution" after the Second World War during which, for many years, economies--even the sickly British economy--prospered. We forget what a golden age the 1950s and 1960s were, especially for the manual working class, with full employment, steadily increasing wages and a growing margin for leisure and fun. When, in 1957, Harold Macmillan vulgarly claimed that Britons had "never had it so good", he was telling nothing less than the truth.

Then, the revolution got into trouble, as all revolutions do in the end, because the world moves on in unexpected ways. Older habits of mind reasserted themselves under Margaret Thatcher in this country and Ronald Reagan in the United States. Since then, it hasn't been as good in our part of the world, except for the shrinking minority of the rich and very rich. The great banking crisis of 2007-2009 brought about huge rescue packages--"stimulus policies", they were called--which Keynes would have approved of, but which were largely instinctive. Practical men knew how to act to save their system from total collapse. Now that the rescue has been done, it's back to business as usual.

The rescue packages left huge public deficits and we all know that deficits, whether public or private, are bad, don't we? You have to cut your coat according to your cloth; you must make ends meet. Anyone who says the contrary is a fool or a knave. So, we are being subjected to a huge programme of cuts: we complain about particular cuts when they hurt us, but we are unable to controvert the logic of the cuts as a whole.

Do the coalition politicians explain why they are behaving in this way? Hardly at all--the Business Secretary, Vince Cable, in his NS Essay of 17 January, was a rare exception. Mostly we just get the soundbites of common sense, which is supposedly bred in the bone. "We can't spend money we haven't got." "We must cut the burden on future generations." "We must keep the confidence of the markets." And, as Thatcher liked to say: "There is no alternative." In reality, there is--but we must dig a little to see what it is, and that requires some intellectual effort.

Two defunct economists compete for our allegiance today. One of them is Keynes. The other is the 19th-century thinker David Ricardo. Everything you read on the financial pages of our press relating to policy refers to one or the other of these gentlemen, though you will rarely hear their names mentioned. …