Watching the Keynesian panacea unravel, day-by-day

ECONOMIC PERSPECTIVES 156 – NOVEMBER 2024

Regular readers are aware of my aversion to Keynesian economic fiction. Basically, I abhor Keynes’ assumption that every economic difficulty is government’s problem (even when government created it) and it is government’s role to deal with it - despite the slide into tyranny that invariably follows even the most well-intentioned state intervention.  Concepts such as hard work, enterprise, competition, never feature in his solution to any problem in economics; it’s always “get the government to do this, that…….” or whatever. 

His solutions provide a tailor-made template for the present Labour administration. Keynes’s belief in the virtues of state-contrived “demand management” (found in his “General Theory of Employment, Interest and Money”) is both shallow and perverse enough to feature in Chancellor Rachel Reeves’ growth plan, otherwise known as “spend, spend and spend”. Keynes wrote:

“If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coal-mines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.” (Only in Alice’s “Looking-Glass Wonderland” can something be “a good deal greater than it actually is”, with or without “the help of the repercussions”, whatever that may mean!)

Wealth distribution

As for the Socialist obsession “to create a more just society” Keynes declares: “an outstanding fault of the economic society in which we live is its arbitrary and inequitable distribution of wealth and incomes”. Arbitrary? Inequitable? And note the assumption that wealth and incomes are “distributed,” despite having first been earned.

His irrational utterances, as you can see, have precious little common-sense appeal - but at last we have a comprehensive analysis of his writings, titled “Where Keynes Went Wrong” by Hunter Lewis. (Lewis could have written a far shorter volume: “What Keynes got right”!) - but I’m delighted he has taken the trouble to quote what Keynes actually said on interest rates, taxes, growth, inflation, money, ‘bubbles’, recessions and the host of economic policy issues that governments perennially wrestle with.

Reading it was a revelation: it evoked the very same sense of unreality and disbelief I experienced more than 60 years ago when I read the text that, in various degrees, has served as the handbook for every left-wing British government, including the present one, over the past 130 years: “The Manifesto of the Communist Party” by Karl Marx & Friedrich Engels. 

Soon after emigrating from South Africa to the UK, I saw Marx’s Manifesto in a bookshop and was curious to ascertain for myself the nature of the creed that had attracted my parents, avowed communists, so compulsively all their lives. It is not a long text and I read it in a single sitting. I was struck by its hate-filled imperatives: abolition of the bourgeoisie family; abolition of private property &c as well as the utter irrationality of its economic theories. According to Marxist theory, the “value” of a product is determined by the sum of wages paid to the workers who created it – so you could double GDP by doubling the wages bill! Whether a customer might actually be willing to pay for it doesn’t figure in assessing its value.

Equality? Of what?

Yet this irrational tripe persists to the present day. On the subject of “equality”, which we now hear about endlessly, the object of today’s Labour Party policies is “equality of outcome” rather than a more rational “equality of opportunity”. Equality of outcome is always a pipe-dream because of the myriad, possibly production-related, variables that are bound to frustrate such a futile aim. 

 I felt compelled to raise the subject of the Manifesto with my father, and expressed astonishment that someone whose sharp intelligence I had always admired could conceivably have fallen for such perverse gobbledegook. He didn’t try to justify this life-long belief, but admitted that as a young man he had encountered a number of alternative “truths”, including the writings of the American economist Henry George - but since Marx  promised a panacea for correcting the world’s iniquities, it was all too easy for my parents to fall in with his ideology, as did their friends. 

It is worth bearing this in mind when considering the Reeves budget. If you have seen through all Labour’s hype on how the new Chancellor will achieve growth and wealth creation you will also have seen that her policies are Marxist to the core. She has promised to apply the UK’s highest tax burden on record, and the highest level of peacetime borrowing, and hence debt, to pay for a massive government spending agenda on populist infrastructure projects, hospitals and schools, the bill for all this being underwritten by higher employment taxes on businesses and tax increases on the wealthy minority who already contribute over 90% of the country’s entire tax-take. Keynes would reach for the champagne to toast this destructive tribute to his spendthrift policies.

What Keynes got wrong, the French economist Jean-Baptiste Say got right

In his “Law of Markets” Say observed (i) that supply creates its own demand, which therefore requires no contrived stimulation; and (ii) that production must therefore precede consumption. This approach, identified by President Reagan as “supply-side” economics, is the very reverse of the Keynesian hypothesis that a sluggish economy must be revived by increasing government spending to raise “aggregate demand” and hence prices, thereby to defeat any incipient deflationary tendency. Prof. Patrick Barron notes in his recent essay on the Going Postal platform, that the Keynesian thesis has been a godsend to generations of profligate political theorists whose tax-and-spend habit has dominated Western governments’ economic thinking for more than a century since it provides a rationale for their unbridled debt creation.

Who are the favoured ‘working people’?

Their latest contrivance is the distinction between “working people” who are shielded from any new taxes and all the out-of-favour categories such as, family farms, non-doms, small businesses and others for whom any plea for tax concessions constitutes a fiscal hate-crime. Worst of all is the punishment meted out to businesses for the crime of employing people. Even the circular con-trick known as “pay-as-you-earn” is ultimately borne by employers as a corporate levy; and National Insurance “contributions” by both employers and employees are just taxes that punish businesses, push up prices and inflate the cost of living. Perverse for a party whose historical raison d’etre is to help “working people”, no? 

The difference between the confected “minimum wage” and a wage determined in a free labour market is of course another product of state intervention, or just another employment tax. Doubly idiotic, because it doesn’t work anyway. By what mad reasoning do the incompetent fools in the Treasury imagine they know how to identify the tipping point when any business is simply unable to afford to employ the one more person it needs? Or even the people already on its payroll? Do those Whitehall nuts ever join up the dots to comprehend the connection between their vapid policy jottings and unemployment? Or the community thus deprived of decent products, shops and services? Any economist with a scintilla of sense knows that anything taxed is diminished, from workers to windows!

It is all so elementary. Puerile, rather. Take another budgetary wheeze: the government thinks that to create huge wealth all that’s needed is to set up a “National Wealth Fund” to invest £50 billion, including £20 billion from private markets, over a 30-year period, in “nascent technologies or projects at an initial stage of  market development”. What an irresistible opportunity, fact-checked by illustrious members of the “Climate Change Committee”. Surely it’s a project in which every sensible member of the electorate would invest their own money, given the chance. 

EMILE WOOLF, NOVEMBER 2024

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