Keynesian economics has been in retreat politically and theoretically for 25 years. If the Keynesians can learn from their critics and curtail their ambitions, a modest rehabilitation is now appropriateby Robert Skidelsky / May 20, 1997 / Leave a comment
Perhaps it is time to revive Keynesian policy. The fact that monetary policy in the US and Britain does, in practice, take into account unemployment and growth as well as inflation is taken as a sign that some secret Keynesian demand management is at work. From this point of view, the odd men out are what Anatole Kaletsky calls the “sado-monetarist” central bankers and finance ministers of continental Europe who are wedded to price stability and the Maastricht criteria. I believe that Keynesian policy does have a role to play in improving the performance and stability of economies. But this belief does not warrant either historical or theoretical amnesia; nor should it blind us to the practical difficulties, particularly on the fiscal side, of reinstating even a modest version of Keynesian policy.
My story falls into three parts. First, the unravelling of the Keynesian revolution; second, I consider a counterfactual: what might have happened to the Keynesian revolution had it been left in the hands of (an ageless) Keynes? Finally, I look at the case for, and conditions of, a cautious revival of Keynesian policy.
In 1976 Keynesian policy was declared dead in its birthplace. In his speech to the Labour party conference, James Callaghan, the prime minister, said that “the option of spending our way out of recession no longer exists”; it had worked in the past only by “injecting bigger and bigger doses of inflation into the economy.” In his 1984 Mais lecture, Nigel Lawson stated the new orthodoxy: “The conquest of inflation should be the objective of macroeconomic policy. And the creation of conditions conducive to growth and employment should be the objective of microeconomic policy.” In the 1985 White Paper, Employment: The Challenge for the Nation, the government accepted responsibility for controlling inflation, deregulating the labour market and providing employment help for particular groups. In his 1994 Mais lecture, Tony Blair endorsed the Lawson framework: a Labour government would have “an explicit target for low and stable inflation” and would balance the budget. Employment would be handled by supply side policy. The main difference was that a Labour government would shift the emphasis from deregulation to “active” supply side policy-education, training and special measures for the longterm unemployed. Contrast this with the famous 1944 White Paper on employment in which the government took responsibility for maintaining a “high and stable level of employment.”