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Is Keynes Dead?

Literally, yes. But the ideas that Keynes produced, Keynesianism and derivatives of, are still alive albeit under-utilised.

The 2008 recession ushered in a new opportunity for Keynesianism, but the artificial demand was created in the sectors less deserving of the capital injection – namely the financial sector. This is not to suggest that the bank bail out was unnecessary, it was crucial in order to stop the systemic collapse of our economy and Quantitative Easing was a welcome opportunity for banks to begin recapitalisation.

The scrappage scheme was a cheap and effective way of boosting demand and output in a small section of manufacturing. This is a positive example of Keynesian theory in action.

However, with lots of problems in the society and economy, more could have been done to solve them. The first is housing, or severe lack of. The second is an ageing infrastructure. The third is an undiversified economy.

The theory behind Keynesianism is that the aggregate demand is artificially boosted by state spending, either from reserves or borrowing on the domestic and international markets. This is to supplement the fall in private investment due to the unpredictability of the economy caused by a recession or similar.

The first problem encountered in the economy is a lack of housing. This blog has posted a fair amount on housing with individual posts or short references to. There is a lack of housing in this country – affordable, for rent etc – and, arguably, the financial crisis which preceded the recession was born out of the bubble created by unsustainable housing prices. The first industry is suffer from the recession was construction. Billions should have been poured into the industry for the purpose of building houses en masse- alleviating the pressure on housing lists and the burden placed on the state in the form of housing benefit. It would have stabilised the housing market and produced jobs for the unemployed, increased aggregate demand and, as an added bonus, increased tax receipts! I call that a win/win situation.

The second problem is an ageing infrastructure. It is evident to everyone in this country that our infrastructure is not fit for purpose. A railway system that has not been largely updated since it was constructed in the nineteenth century. Airports that close at the lightest of snowfalls. A road system that has become congested. Telephone lines that are not fit for the digital age. Thankfully, steps were made to address some of these, however partial they were. The high-speed rail, initiated by Labour, has been taken on by the Coalition Government. The result of improving the infrastructure is increased aggregate demand, reduced unemployment and increased tax receipts with the option of leasing these infrastructure developments back to the private sector, thus creating another revenue stream. Win/win? It sure is!

The third problem of a lack of diversity in the economy can be simply solved by following the lessons of the scrappage scheme. State involvement can be minimal but the effects will be profound. The state provides the necessary capital investment and lets the private sector do its thing. This can be done in the new growth areas, such as renewable energy (also reduces overall long-term energy costs and secures our energy provision), knowledge economy (which includes Higher Education), etc. Needless to say it produces a win/win situation and creates a more stable, more diverse economy.

While these problems were not addressed properly by the previous Labour Government, and nor was Keynes invoked properly, there could very well be a situation where Keynesianism is needed and soon. It is fair to say that consumer demand has almost disappeared as consumer confidence has dropped rapidly. Before waiting for a double-dip recession or crisis on a similar scale it would be wise of the Coalition to start practising Keynesianism…

Categories: Uncategorized
  1. Ust Oldfield
    January 23, 2012 at 10:18

    Reblogged this on The Guerrilla Economist.

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