Things are rather different in the case of another typical ‘progressive’ argument which I implicitly ask my progressive friends to use sparingly. It is the argument that a proposed reform is not only compatible with previous progressive achievements, but will actually strengthen them and will be strengthened by them. Progressives will often argue that ‘all good things go together’ or that there is no conceivable area of conflict between two desirable objectives (e.g. ‘the choice between environmental protection and economic growth is a false one’). In itself, this is an attractive and seemingly innocuous way of arguing and my advice to reformers cannot be never to use this argument. Given their considerable interest in arguing along mutual support, rather than jeopardy lines, reformers may actually come upon, and will obviously then want to invoke, various obvious and non-obvious reasons why ‘synergy’ between two reforms exists or can be expected to come into being.
My point is rather that reformers should not leave it to their opponents, but should themselves make an effort to explore also the opposite possibility: that of some conflict or friction existing or arising between a proposed and a past reform or between two currently proposed programmes. If reformers fail to look in this direction and, in general, are not prepared to entertain the notion that any reform is likely to have some costs, then they will be ill-equipped for useful discussions with their conservative opponents.
For example, it would be disingenuous to pretend that stimulating economic growth and correcting or attenuating inequalities that arise in the course of growth require exactly the same policies. The problem rather consists in finding an optimal combination of policies that does as little damage as possible to either objective. We are more likely to find something close to this optimum if we admit from the outset that we are in the presence of two objectives between which there exists normally a good deal of tension and conflict.
CHAPTER 3
The Fall of Keynesianism
A Historian’s View
Robert Skidelsky
I
The 1950s and 1960s were a capitalist golden age, even in slow-growing Britain. By historical standards, unemployment was exceptionally low, growth in real incomes exceptionally fast, economies exceptionally stable; all were achieved at a very modest cost in inflation. Although there were some sceptical voices, the consensus at the time was that this achievement was produced by something called ‘Keynesianism’. In the 1970s, the golden age was replaced by a silver age of ‘slumpflation’, in which growth rates halved and unemployment and inflation increased simultaneously. By the end of the decade a consensus had emerged that this sorry record, too, was the result of ‘Keynesianism’, and the 1980s were aggressively anti-Keynesian.
Today Keynesianism is dead as policy. Most governments have inflation, not employment, targets; belief in discretionary management of the macro-economy has all but vanished. For Britain, the crucial stages in the demise of Keynesian policy can be traced in the speech of James Callaghan to the Labour Party conference in 1976, Nigel Lawson’s Mais lecture of 1984, and the 1985 White Paper, Employment: The Challenge to the Nation.1 Keynesian economics, of course, continues to exist in the sense that macroeconomics is still taught to all economics students, and even monetarism can be regarded as a dissident branch of Keynesianism.2 Moreover, the re-emergence of mass unemployment in the 1980s has stimulated a ‘new Keynesian’ research programme aiming to show rigorously how wage and price rigidities – central but unexplained features of the original Keynesian model – arise from the microeconomics of wage and price setting in imperfect markets.3 However, belief in the Keynesian model of the economy, as opposed to use of Keynes’s analytical framework, is confined to a minority of economists.
The problem here is to explain the ‘fall of Keynesianism’. There is no doubt that Keynesianism was engulfed in what Albert Hirschman calls a ‘rhetoric of reaction’ and savaged in the name of futility, perversity and jeopardy.4 The point of interest is how far this rhetoric was simply rhetorical, and how far it pointed out ‘real’ failures in Keynesianism. Rhetoric is the art of persuading by language rather than by argument or proofs: one can write better than one thinks. But is the central monetarist proposition that ‘Changes in nominal variables have no real effects’ simply a piece of rhetoric? (It is, of course, a classic example of what Hirschman calls the ‘futility thesis’.) According to Donald McCloskey, economics is so impregnated with rhetoric that it makes little sense to ask which economic propositions are rhetorical and which, in some sense, are true.5 But this begs the question of why some kinds of rhetoric flourish at some times and decay at others, or why one should prefer one kind of rhetoric to another.
I want to explore the idea that Keynesianism was undermined by real failures and not just by rhetoric. If we take Keynesianism, minimally, to be a set of ideas and policies, we have three possible sources for its failure. The first is that it misdiagnosed the causes of the social ills (such as unemployment) it set out to cure and therefore its remedies were mischievous and, in fact, created other problems (such as inflation). A sub-issue here is the extent to which Keynesian ideas, as generally accepted, were the ideas of Keynes. Secondly, one might argue that the Keynesian revolution was wrecked by policy mistakes. The ideas were right, and might have been applied with success, but in fact were not. Between the idea and the policy something intervened (such as the political process) which ensured that the idea was so badly applied that it did more harm than good. An important issue here concerns the value of ideas the fulfilment of whose promise depends on perfect application. Finally, it might be argued that the ideas and policies were right for their times, but were made obsolete by a change in the facts. In practice, these explanations are very hard to disentangle. In economic models, most of the facts a historian might wish to explain are taken as given – technically they are exogenous variables. And so it is with the typically named OPEC oil price ‘shock’ of 1973–4, which supposedly brought the Keynesian age to an end. But though this event, which represented a real change in the ‘state of the world’, was unpredicted, it was not uncaused, and part of the cause may have been the way economies were run in the ‘Keynesian’ age. Unexpected events are often no more than the unexpected consequences of policy decisions.
In the following section I offer some hypotheses which might explain the downfall of Keynesianism. I then test them informally by means of an opinionated history, and end with some concluding reflections.
II
Keynes himself seemed to pre-empt one answer to the question of what caused his revolution to fail when he remarked, famously, that ideas are more powerful than vested interests and strongly implied that in economics, as in all sciences, newer ideas are likely to be truer than older ones (the progressive credo).6 Both Keynesian and anti-Keynesian economists have taken him at his word, the Keynesians attributing the defeat of the ‘classical’ system to flaws in its reasoning corrected by Keynes, and anti-Keynesians explaining the ‘fall’ of Keynesian ideas by flaws in Keynesian reasoning corrected by Friedman and others.
Milton Friedman says that Keynes was a great economist: he asked the right questions, but the answers he gave were wrong – they did not stand up against evidence and experience.7Friedman’s own inter-linked investigations of the consumption and ‘demand for money’ functions convinced him that economies were much more stable than Keynes believed. The severity of the Great Depression, then, was wholly the result of policy mistakes, avoidable on existing theory. There was no need for a ‘Keynesian revolution’. Similarly, Harry Johnson argues that it was not wrong theory, but wrong policy, which produced Britain’s mass unemployment in the 1920s.8 More fundamentally, Hayek argues that the whole of macroeconomics was