The economic policy of any government is one of the most politically charged elements of its portfolio. This should be an obvious point, but is not always fully appreciated by economists who deal primarily with data and, in the modern form of the discipline, through abstracted models. This point was also obscured for us all during the 2000s boom years when the rising tide seemed to lift all boats, and the great battles over economic policy appeared to be a thing of the past. Tweaks here and there to policy could be left to the technocrats and need not concern the electorate too much.
The recent financial crisis has stimulated a justifiable interest in the future of developed economies. Since the 2008 Lehman Brothers collapse the economics discipline has been forced to confront its failings. As Dominic Lawson has noted, it has partially undergone a much needed shift towards behavioural economics rather than the cold “rational” mathematical economics that failed so spectacularly. However, as this article describes, there remains enormous scope for a more fundamental rethinking of the political economy of the developed world.
The financial crises since 2007 have led to a resurgence in the stock of John Maynard Keynes. Recognised as one of the giants of economics, Keynes had been overtaken and largely forgotten by the neo-classical economics that had dominated public policy since the 1980s. Yet, Keynes’ concept of government stimulus spending became the go-to policy for a number of world governments desperate to avoid economic catastrophe. As Robert Lucas, a prominent member of the neo-classical orthodoxy, has dismissively remarked, “Everyone is a Keynesian in a foxhole”. Is this the limit to which Keynes is of use to us in the present?