Article from THE GUARDIAN, September 18, 2000

[Paul Davidson <pdavidson@xxxxxxx>]

The following article appeared in the GUARDIAN on September 18, 2000

                                    Commentary

                                    Keynes, you should be alive this hour

                                    Paul Davidson
                                    Guardian

                                    Monday September 18, 2000

                                    John Maynard Keynes, one of the
founding fathers of the World
                                    Bank and the IMF, once toasted
economists as "trustees, not of
                                    civilisation, but of the possibilities
of civilisation."

                                    As the bank and the fund begin their
protest-ridden annual
                                    meeting in Prague, it is worth asking
whether today's
                                    economists are living up to Keynes'
dictum. We have seen that
                                    the idea that planned economies
provide an economic utopia
                                    where civilisation can flourish is
nonsense. Nevertheless, the
                                    Thatcher claim that liberalised
financial markets are always
                                    efficient and are mankind's only hope
for economic and social
                                    progress has also seen to be wanting.

                                    Many have been searching for a "third
way" occupying the
                                    middle ground in the place of the
polar views of planning vs
                                    laissez-faire. This "third way" hunt
has become the conventional
                                    wisdom for Britain's "New Labour" and
Germany's "New Social
                                    Democrats". Having apparently seen the
writing on the wall,
                                    Gordon Brown is encouraging some
contingency economic
                                    thinking. His Royal Economic Society
lecture earlier this year
                                    and the fact that the Treasury has
started to hold private
                                    seminars titled "Keynes in the 21st
century" indicates that this
                                    Labour government's third way includes
a search for resurrecting
                                    Keynes' civilising economic principles
and policies.

                                    Unfortunately, Keynes' argument for
remedying the serious flaws
                                    of our entrepreneurial economy without
destroying the spirit of
                                    enterprise or the promotion of a
civilized society is not well
                                    understood by the Bank of England or
the Treasury.

                                    If Keynes was alive today and the
chancellor invited him to
                                    address one of the Treasury's private
seminars, Keynes would
                                    stress the following points.

                                    ? The "outstanding faults" of an
entrepreneurial society are its
                                    failure to provide sustained full
employment and its arbitrary and
                                    inequitable distribution of income and
wealth.

                                    ? The failure to provide sustainable
full employment is not due to
                                    supply-side market imperfections such
as monopolies or rigid
                                    wages. Policies designed to increase
wage-price and exchange
                                    rate flexibility while liberalising
financial markets may well
                                    exacerbate unemployment.

                                    ? Government's responsibility is to
"exercise a guiding influence"
                                    on private spending decisions to
ensure that there is never a
                                    persistent lack of effective demand.
Government operating
                                    budgets should be balanced. If private
spending fails to produce
                                    full employment (especially if
entrepreneurial exuberance fades),
                                    government should run a capital
account deficit to employ
                                    resources to produce, with the
cooperation of private initiative,
                                    additional productive facilities.

                                    ? Unemployed workers and excessive
idle capacity is a "public
                                    scandal of wasted resources". The
ultimate cause of such a
                                    scandal is nested in the human
weakness of speculation and an
                                    obsession with liquidity. A necessary
condition for solving the
                                    unemployment problem involves damping
destabilising financial
                                    speculation to assure orderly
financial markets and providing
                                    cheaply all the liquidity that
entrepreneurs can use.

                                    ? Liquidity is a double-edged sword.
The good cutting edge is
                                    that by providing an orderly market
where financial assets can
                                    be readily resold encourages savers to
provide funding to
                                    entrepreneurial investments. Without
liquidity, the risk of funding
                                    investments as a minority owner would
be intolerable. The "bad"
                                    edge of the sword is that if a strong
bearish view develops, the
                                    resulting demand for liquidity impedes
the production of new
                                    investments even when real resources
are available to be
                                    employed.

                                    In November, Lord (Robert) Skidelsky's
third volume of his
                                    biography of Keynes, Fighting For
Britain, will be published. I
                                    advise the chancellor to read
Skidelsky's biography to see how
                                    these five principles were used by
Keynes to develop policies
                                    that promoted the possibilities of
civilization for postwar Britain
                                    and the global community.

                                    Paul Davidson is Holly chair of
excellence in political economy
                                    at the University of Tennessee














Paul Davidson
Holly  Chair of Excellence in Political Economy
Editor, Journal of Post Keynesian Economics
Economics Department - 523 SMC
University of Tennessee
Knoxville, Tennessee 37996-0550
phone # (865) 974-4221
fax # (865) 974-1686
home fax # (865) 577-7747
http://econ.bus.utk.edu/Davidson.html