MYTHS

The credit crunch and the reaction to it has given rise to two myths. The first one relates to the issue of Keynesianism.

Keynes wrote his book, The General Theory of Employment, Interest and Money, in response to the unemployment in the 1930s. He was not interested in all forms of unemployment, but was primarily concerned with understanding as to why the unemployment of the 1930s was persistent when classical economists believed that the market would self-correct and so re-employ the unemployed.

Keynes took particular issue with Says Law, which held that supply would never exceed demand. Keynes regarded Says Law as wrong as unemployment was an excess of supply [of labour] over demand [the number of jobs available].

Keynes believed that full employment was not necessarily a natural state of affairs and that it was the role of government to intervene in the economy to ensure a level of output consistent with full employment. Keynes believed that output was determined by effective demand, consisting of consumer demand and investment; and that the level of investment was more volatile than consumption and had a disproportionate effect on employment.

One of the problems identified by Keynes, was a situation in which interest rates would not fall sufficiently and that there could be a situation where people and institutions were hording cash [liquidity preference] - thereby reducing demand. Keynes believed that one of the reasons for the 1930s slump was that interest rates did not fall far enough and that liquidity preference was high.

Keynes believed that the government needed to intervene to force down interest rates and/or increase effective demand either by tax cuts, or by increasing government spending on capital projects.

Labour’s reaction to the credit crunch, in which the banks are keeping up interest rates and are openly hording cash, is to spend tens of £billions reflating the insolvent banks, and pumping hundreds of £billions into the banks via the Bank of England. Meanwhile the government has made a 2.5% cut in VAT and has postponed the building of two aircraft carriers.

If Labour thought that the banks would very nicely lend money again given all the money they have received, then they have been proved wrong. If Labour thought that people would be tempted into spending money they do not have by a piffling 2.5% cut in VAT, then they have been proved wrong. Quite what relevance encouraging consumers to buy DVD players or televisions and suchlike, built in China and the Far East, has to cutting unemployment in Britain is not explained. Although Gordon Brown seems to think that he can persuade foreign governments to increase their own government spending and thus, presumably create jobs for British exporters.

With respect, this is not Keynesianism and Keynes is most unlikely to have advocated such naïve nonsense. He was trying to understand and solve the continuing unemployment of the 1930s, whereas Labour’s current policies are simply increasing unemployment.

The numbers of people seeking work are dependent on a number of factors, not all of which are economic. The size of the workforce is influenced by the birth rate several decades earlier, itself determined by non-economic factors, and also by immigration. Labour’s immigration policy pointedly refused to take account of the impact on the economy and is determined by their determination to reduce the English into being a minority in England and by their desire to support the creation of an EU suprastate.

The size of the workforce is also determined by retirement and the ability to retire on a pension. Labour have destroyed the private pension system, which in turn reduces the amount saved and thus the level of investment.

Labour are now promising to reclassify many of those currently on incapacity benefit as being unemployed. This might save money and remove the hidden unemployment created in the 1980s and 90s - but it does not create jobs.

It should be remembered that Keynes was writing in the 1930s and that the world has changed. For example, Keynes believed that an increase in inflation would be a means of reducing wages as he thought that the unions would not realize that the money income was being eroded. In fact, the unions were more alert than he presumed.

Also, in the 1930s, Britain was a major industrial power and increases in demand would result in increases in demand for British goods within Britain. Today, Britain is de-industrializing, as a result of government policy, and the import penetration of the home market means that much of an increase in demand will benefit foreign producers and suck in more imports. Also, there was no mass immigration in the 1930s.

The Tories seem to think that the problem is that Labour have been insufficiently generous to the bankers and that more £billions should be given to them. Labour now seem to be taking a similar view. Quite why showering hundreds of £billions on the banks, who will promptly horde that money, is a solution to the credit crunch is unexplained. The banks should be by-passed and should have been left to stew in their own juice. In the age of the internet, it is not necessary to have a nationwide branch network in order to lend money to ordinary people.

It is Labour’s rejection of the nation state that is the reason for their failed economic policy. They refuse to promote the national economy and local industry. Labour prefers super casinos. Mr Brown prefers to grandstand as saving the world’s banking system, rather than concentrate on running the home economy. Labour are determined to promote mass immigration and increase the numbers of those seeking work, which can only force down wages and living standards, and increase unemployment. Their disdain for the defence of the realm, means that they are happy to stall the building of desperately needed aircraft carriers regardless of the impact on jobs.

Labour are the problem, not the solution.