The Owl of Minerva takes flight at dusk: The anti-Keynesian era is drawing to a close
By Harold R. Chorney, Professor of political economy, Concordia university, Montreal.( I originally submitted this to the New York Times as an op ed .They chose not to publish it so I am presenting it here.)
The recent debate over debts, economic growth and the flawed work of two Harvard economists Carmen Reinhart and Kenneth Rogoff has in the clash of ideas, theories and interpreted facts yielded very bright sparks of enlightenment. It should now be clearer that the road to renewed prosperity cannot lie with a policy that has been discredited by what we have witnessed in Europe over the past five years. No one in their right mind could judge 27% unemployment in Spain and Greece, 17.5 % in Portugal and 11.0% unemployment in France, 11.5% in Italy and an overall unemployment rate of 12 .1% in Europe, as a policy success. Youth unemployment at 59 % in Greece, 56% in Spain, 38.2 % in Portugal and 37.8 % in Italy five years after the crash is clear evidence of destabilizing policy failure. (data from Eurostat)
The anti Keynesian economics of the mainstream identified with fiscal orthodoxy and austerity. Economists called this approach “new classical macroeconomics” to remind us of the pre- Keynesian classicals who had emphasized the perfect rationality of markets and their ability to recover from a crisis without government intervention and counter cyclical deficit spending. This school and its solutions is now shown to be a chimera just as it was during the 1920s and 30s. Increasingly, the long silenced minority of economists who in the past were intimidated by the economics establishment and the control over grants, degrees and jobs have begun aggressively to question the wisdom of this now old orthodoxy that first arose in response to the monetarist counterrevolution led by Milton Friedman and the neo-cons in the 1960s and 1970s.Young graduate students born after the Keynesians had been banished are keen to learn as much as possible about Keynesian doctrine and the new economics of low unemployment.
I know something of this counterrevolution because I was trained by Keynesians at the University of Manitoba in the 1960s including one who had done graduate work at the University of Chicago and another who knew the work of Hyman Minsky whose work predicted the kind of financial crisis and crash we experienced. I then was taught by monetarists like Harry Johnson as well as more heterodox thinkers like A. Sen and Michio Morishima in the early 1970s at the LSE. During my career I witnessed the triumph of the anti- Keynesians to the point that I sought refuge in a department of political science. I also witnessed the beginning of the rise of Margaret Thatcher while I was a graduate student in the U.K. But Milton Friedman, Margaret Thatcher, and Harry Johnson who coined the phrase the monetarist counterrevolution are all history now. It is more than forty years later.
An epoch is coming to a close. Like all epochs birthing a new one is often unclear, confusing and painful as it unfolds but unfold it must. The intellectual supports for this old anti-Keynesian epoch are no longer viable. Inflation is nowhere the threat for the moment despite a substantial experiment with quantitative easing and deficit finance over a period of more than four years. The results have been less that hoped for . But that is not because the theories are flawed but because adjustments are needed in the strategy. Pressing on the brakes through austerity while at the same time seeking to stimulate through deficit spending does not work efficiently and results in unnecessary frictions and too slow a process of recovery. Entrepreneurial animal spirits are reawakening. New innovations, products and technologies are developing. American real estate markets are slowly recovering. Distributional reforms are actively being discussed. Globalization and offshoring continue to be a complexity. The body politic is awake and increasingly vigilant. Some of the self- limiting and self-directing qualities of the market driven cycle are returning.
The liberal humanist hour is nearly upon us. As the old epoch recedes the new one is taking shape to replace it. It simply needs a boost from the fiscal tax and expenditure side to enable it to do the necessary work. If this were to be done the unemployment rate would continue its downward path and fall below 6 %. In North America with the help of the Fed, the Bank of Canada and the Bank of Japan this kind of stimulus would be enough to assure the likelihood of the path to a faster recovery. If Europe were to switch from austerity to stimulus the path would be accelerated. According to several prominent members of the French Government, Chancellor Merkel is one of the last remaining holdouts opposed to a switch in policy. There are big stakes in play here. Germany and France are at the heart of the European project. It is important for the decision takers to understand that the future of the EU common currency and the future well being of millions of Europeans as well citizens from all over the globe are in play. The pendulum is swinging. All it needs is one last powerful push in the Keynesian direction.