Investment can benefit society and help stabilise the economy. A separate capital budget, distanced from political interference, is the best way forwardby Robert Skidelsky / August 8, 2017 / Leave a comment
Deficit fetishism has finally been defeated. As I recently wrote in these pages, this year’s Queen’s speech finally put “strengthening the economy” ahead of “the public finances.”
This is progress. But there is still no agreement on what should replace austerity. If the doctrine that a country can cut its way back to prosperity is dead, the hunt for new answers should start with the most obvious alternative—enriching ourselves by investing in valuable things.
The state must reaffirm its own role here. In the Keynesian post-war age, it was accepted that the state had an important—and probably increasing—part to play in capital formation. Yet since the 1970s, things have gone the other way. In the UK, public investment as a share of total investment fell from 42 per cent from 1960-75, to 20 per cent from 1975-2013.
This is the fruit of Thatcherism, an ideology which assumed state investment programmes were bound to be wasteful and inefficient, and that the private sector—the presumed source of all innovation—would already have ploughed money into any projects that were was truly worthwhile. Some of these charges had a basis in the loss-making record of the nationalised industries. But even if there were some real flaws in the older models of state investment, these were contrasted with an unjustifiably idealised model of private investment.
The crash of 2008 and the long slump that followed exposed the fallacy of “the market knows best.” It is time to redress the argument.
Investment can foster stability
The first big reason to reenergize public investment is that it can foster a more stable economy. Private investment is inherently volatile, depending, as it does, on what Keynes famously called “animal spirits.” Having a large, stable state investor is a useful counterweight to this.
The fall in the state’s investment share since the 1970s has rendered total investment more volatile and crises more likely. The cuts in public investment were the most egregious mistake of George Osborne’s austerity policy. Politically, they were easy to make because the projects involved had often not started. Economically, they were a disaster. The immediate drag on the recovery was only the start of it.
Even in normal times, when recession and recovery are not the issue, there are two grounds for favouring a beefed-up role for state investment. The first was given by Adam Smith: the state has a duty to provide “public…