Hi to you all!
Our economics society went to La Fundacion Ramon Areces as group and we listened Lord Robert Skidelsky in Madrid, the 4th of October 2011.Here is a summary of the main points of his chat. It was brief but concise.If you wish, you may listen to the talk on-line. Here is the link: http://www.fundacionareces.es/fundacionareces/portal.do?IDM=90&NM=1
The return of the master?
By Félix Muriel Lorenzo.
My reflections on the visit of the leading economist Lord Robert Skidelsky to the Fundación Ramón Areces in Madrid, the 4th of October 2011.
Skidelsky came to Madrid the 4th of October, 81 years after Keynes’ visit to Madrid to give a lecture based on the topic of “Political Economics of our grandchildren,” at the Residencia de Estudiantes. But was this lecture really the return of the master’s ideas? For, although Skidelsky has studied Keynes with great dedication, as he mentioned, “I’ve dedicated a lot of my life to Keynes and it is hard to resist talking about him,” his approaches to today’s problems were not purely Keynesian.
Skidelsky’s first words were to highlight the problems which many advanced economies were suffering as a result of the 2007-2009 slump. Skidelsky referred to a high output gap, economic stagnation due to a meager recovery in 2010 and finally unemployment as some of the major problems which economies were facing. Skidelsky, being in Madrid, mentioned Spain’s high unemployment rates, particularly youth unemployment rates. However, during the rest of the conference, he barely made mention to the unemployment problem. Clearly, the world’s financial problems are worse than its unemployment problems, and although advanced economies do not have Spain’s figures, some such as the US do have worryingly high unemployment rates. Nevertheless, for Keynes, today’s unemployment, particularly Spain’s, would have been a major issue. Keynes would have probably stressed the need to lower interest rates and increase investment to reduce unemployment. This would be due to the fact that low business investment due to the dim animal spirits of businessmen would result in low aggregate demand levels and hence in low unemployment as the economy would be stuck at an “under-employment equilibrium.” Therefore, Keynes would advocate for stimulus – his “inducement to invest.” As Skidelsky wrote in the “Essay: Ideas and the World” (The Economist, Thursday, Nov. 2000), in Keynes’ General Theory, “interest and money are yoked to unemployment as horse to carriage.” Keynes would have hence given greater importance to unemployment had he returned to Madrid on Tuesday.
Nevertheless, Skidelsky did outline many Keynesian policies to help the EU escape from its sovereign debt crisis. Here he did take a Keynesian stance on the issue. Skidelsky criticised the Hayekian policies of today’s European leaders, in particular, Wolfgang Schäuble, citing Schäuble’s phrase with regards to Greece’s debt, “you don’t cure an alcoholic by giving him more alcohol.” Skidelsky exposed that austerity was not the solution to Europe’s mounting debt problems. As he explained, austerity would lead to falls in GDP and this would mean that the burden of debt as a ratio to the GDP would become even greater. As he termed it, “mountain after mountain of debt in the absence of growth policies would become unsustainable.” He stated that bond markets were already taking notice of this. Skidelsky expressed the view that “austerity resembles the medieval medical practice of bleeding a sick person to purge the rockiness of his blood, a practice which would frequently lead to the patient’s death.” Hence, Skidelsky coincides with Keynes in Keynes’ criticisms of austerity as a solution to crisis.
Skidelsky was very convinced during the talk of the need to “grow our way of recession, not cut our way out of it.” For him the solution would be to find alternative ways of investment in capital, not purely through governments, but also through sovereign funds and banks, which according to him should be encouraged to invest on capital, not bonds. Keynes worried about the uncertainty of our current economic system, would have partly disagreed with him. For Keynes, the only way to create growth would be through government investment (the G in the AD=C+I+G+X-M formula), to generate jobs and provide the certainty necessary for entrepreneurs to invest again and revive the economy. What Keynes would recommend would be a response to the low investment levels mainly through the government. This is as Skidelsky explained, “when private investment falls the government should step in, to counterbalance this fall in private investment.” Skidelsky also discriminated between the different types of government spending. While indicating that current and capital expenditure should be managed separately and that government should focus on capital expenditure, Skidelsky kept silent on what were his ideas with regards to current expenditures. Another difference between the views of the master (Keynes) and his biographer would be that while Keynes believed that GDP growth was necessary to reduce unemployment and create jobs, Skidelsky viewed the mentioned growth policies as vital to reduce debt. That is, Skidelsky’s main concern would be debt levels in the economy, unlike Keynes’ view, mainly focused on unemployment. Debt levels represent a monetarist or Hayekian concern, but not a Keynesian concern.
Skidelsky did share however Keynes’ views with regards to a global solution to the current economic problems. Skidelsky was hence advocating a coordinated response to the crisis, as opposed to the possibility of disintegration which he also explained. Skidelsky put Gordon Brown’s “G-20 growth compact” model as an exemplar solution to our problems. Skidelsky firstly recommended the reform of the world monetary systems, which according to him were reliant on a “bargain” between the USA and China on currency reserves and exchange rates. Skidelsky also stressed the need to end the world’s current account imbalances, stating that “German and Chinese 21st Century mercantilism” would lead to protectionism and the end of globalization. In Skidelsky’s view, Germany’s current account surplus would impoverish Europe and shatter the EU and Chinese policies would lead to the end of the world’s trading and payment systems. However Skidelsky was highly pessimistic on the possibility of this reform happening, as it “relies on readjustments that are too large to be voluntarily undertaken.” Skidelsky also pointed out that “political leadership was not up to the idea of forging a global growth compact.”
Skidelsky also mentioned the necessity of banking reform. As he put it, a “return to Bretton Woods (1944) was necessary,” meaning that the financial system had to be reformed. Quite in line with orthodox Keynesian thinking, which views the financial system as the source of major crisis, Skidelsky accused lax regulation and excessive financial speculation as being responsible for the current stagnation. Skidelsky stated that finance had to be “tamed” and not only reformed. This was accompanied by a request to control the power of great banking. Keynes would agree with this, as Keynes being a firm defender of “managed capitalism.” Skidelsky, while recognising that some progress had been made on this issue, in terms of the beefing up of financial regulatory systems and in the recapitalisation of banks, expressed his concern for the fact that the Vicars report in the UK had been “pushed back 8 or 9 years.” Skidelsky also criticised the lack of talk amongst the world’s leaders with regards to limiting the powers of great banks. For this he cited a phrase of Churchill of 1925, “I would be happier to see finance less proud and industry more content.” For Skidelsky, the actual banking reform is incomplete and must rely on a coordinated response to the crisis, again a completely Keynesian view on the issue.
Finally, Skidelsky also included the importance of macroeconomic policy coordination as part of the response to the crisis, in order to boost aggregate demand levels. This would be in line with Keynes’ liking of global solutions to crisis. However, Skidelsky partially contradicted this view stating that for him the solutions to this crisis should be reliant on boosting local aggregate demand levels and not on foreign-led growth. In fact, when later asked by the public about the possible leakages derived from stimulus plans, Skidelsky even mentioned the possibility of attaching protectionist measures to stimuli in order to prevent leakages. Surely Keynes would have disagreed with this, in his defense of global solutions to economic slumps. In fact the recognition that stimuli can fail due to leakages – a view which Skidelsky accepted at this conference – seems taken from the criticism of Hayek, Milton Friedman and other monetarists to Keynesian stimulus policies. Skidelsky stated that the most important thing is “to ensure that money is spent, not to simply inject it.” This is a subtle difference from Keynes’ policies, which were mainly concerned with simply injecting money into the economy, without regard to the leakages involved in them. For Keynes, stimulus policies would lead to a multiplier effect on aggregate demand and GDP levels and was hence less worried about possible leakages arising from them.
Skidelsky was clear in his criticism of the “dominant Chicago School paradigm whose rational theory expectations hypothesis” denied any economic catastrophe such as the one we have suffered during these years. He stated that “economics was in a mess.” Skidelsky was quite vocal in his critics of the Chicago University school of thought, explaining that its models based on perfect information which enabled decentralized markets were a failure. He stated that shares had been undervalued and to back this up he cited Alan Greenspan, former president of the Federal Reserve, speaking in October 2008: “risk had been underpriced in the years previous to the financial crisis.” According to Skidelsky this was due to the fact that markets do not have perfect information, and that market failure, in this case in the form of asymmetric information, exists. Orthodox Keynesian theory would agree with this, as it is based on the idea market forces do not always work perfectly and that they sometimes lead the market away from the socially optimal equilibrium level.
Summing up, I assisted to a magnificent conference given by Skidelsky at Madrid. Nevertheless, it was not the complete or full return of the master, Keynes, for Skidelsky’s and Keynes’ beliefs have some points in common, but also some differences.
Félix Muriel Lorenzo, Madrid, 7th of October 2011.
