Utopia, Superstition and Keynes

Sir Thomas More’s Utopia was an “ideal state”, though for some a mandatory belief in God and the afterlife and a lack of tolerance for hanky-panky would be testing. Of course, More did not believe that an ideal state was achievable and neither do modern-day socialists cum left-leaning liberals. But the shimmering prospect of a much better world where economic disadvantage is largely absent still drives the agenda of those on the left of the political spectrum. When the possibility of freeing all from poverty and from “the slings and arrows of outrageous fortune” is a “light on the hill”, not a mirage, there is always much to do and inaction is untenable and in fact immoral.

What has Keynes to do with this continuous call to arms? Keynes laid the basis for the development of an economic recipe for action to combat recessions which fits into a worldview that we have the duty and importantly, collectively the knowledge and power, to solve economic problems. Keynesian economics brings economic authority into a powerful coalescence with the moral imperative to act.

Conservative thought is really up against it in questioning this worldview. It’s hard to capture hearts and minds when you question whether we can afford to give everyone timely access to good quality health care; whether homelessness and child poverty can be entirely eliminated; whether the continued provision of foreign aid does anything to cure Third World poverty. It is particularly hard to question whether government spending does more harm than good in combating unemployment in the face of the moral imperative that something must be done and the economic authority that says something can be done. But as hard as it is, the fight has to be fought because experience shows that our knowledge and power are modest when set against economic forces of scarcity and caprice. Conservative thought is not about doing nothing but about making realistic assessments of what can be done. It should not yield the moral or economic high ground to those with unrealistic visions.

Socialism in its more extreme form advocates government control over the means of production, distribution and exchange. But these days, with the experience of Eastern Europe still fresh and populations enamoured with the wealth capitalism has brought, the Left has taken on a much less extreme face. It is now all about government taming the capitalist system to varying extents, depending on the circumstances and the times, not overthrowing it. But whatever form the political Left takes, utopia lurks as a beguiling prospect to one extent or other. The sine qua non of the political Left is, I suggest, a conviction consistent with its worldview that with the will we can eliminate, or go a long way towards eliminating, poverty and disadvantage.

This is not about making measured progress or about improving the lot of the disadvantaged, because everyone believes this is possible and should be pursued. It is about the quantity of improvement and about our ability to bring it about. It is about a powerful superstition-like ideology (in the sense of being excessively credulous) which says that people acting together in a community can control events and produce the outcome they desire.

This way of thinking, as with more common-or-garden superstitions, can be impervious to logic and experience. For example, Obama and Geithner claim they will save millions of jobs through the US stimulus package; this despite unemployment continuing to rise beyond their expectations. Rudd and Swan make similar claims for the benefits of their stimulus package. These claims will survive intact whatever the outcome and evidence, because they are accepted without question as part of the ideological superstition that economic events can be controlled and moulded into shape.

It is a mistake to think we are now so sophisticated that superstition is a thing of the past. It is not; it is just packaged differently now. For example, President Obama can say that we will “wield technology’s wonders to raise heath care’s quality and lower its cost” or, of developing economies, “let clean water flow”. Rudd can say that he will end the blame game with the states and give us an education revolution. It is all just accepted on face value or at least treated with more credibility than flying saucer sightings, even though it is equally fanciful. But within a worldview where utopian-like progress is achievable through our own collective efforts, it’s all perfectly possible. Gaps in front teeth and mirrors in the kitchen are not taken seriously as omens of impending wealth, but some think Obama can make clean water flow throughout the developing world. Which is less tenable?

Neo-liberalism (free market capitalism), blamed by the Prime Minister for our current economic ills, would probably be regarded by Churchill in a similar light as democracy—worse than any other system except for all the rest. But Churchill was a realist, not a utopian: “I have nothing to offer but blood, toil, tears and sweat”, he said; though admittedly in particularly threatening times.

Those on the Left believe that things can be put right and kept right if only we have the right amount of government involvement in the affairs of men and women; to wit Hawke’s pledge in 1987 that no child would live in poverty in Australia by 1990. As silly as it was when he said it and more so with the benefit of hindsight it did not, for example, at all dissuade Rudd from taking to the 2020 Summit a proposal to create one-stop universal pre-school and child-care centres for all children under five by 2020. This common thread of over-promising among those on the Left applies perhaps with even more force in the United States, probably because over-promising tends to be proportional to economic and population size. It’s hard to over-promise and be taken seriously if there are a few of you on a small desert island. Consider the extracts below from Clinton’s second inauguration speech and Obama’s inauguration speech:

 [Clinton:] The promise we sought in a new land we will find again in a land of new promise … In this new land education will be every citizen’s most prized possession. Our schools will have the highest standards in the world, igniting the spark of possibility in the eyes of every girl and boy … Our streets will echo again to the laughter of children … Everyone who can work, will work, with today’s permanent underclass part of tomorrow’s growing middle class. New miracles of medicine …

[Obama:] We will … wield technology’s wonders to raise heath care’s quality and lower its cost … To the people of poor nations, we pledge to make your farms flourish and let clean water flow … We will harness the sun and the winds and the soil to fuel our cars and run our factories …

Now contrast Reagan looking forward in his first inauguration speech; back, it seems, to blood and toil:

Can we solve the problems confronting us? Well, the answer is an unequivocal “yes” … In the days ahead I will propose removing the road blocks that have slowed our economy and reduced productivity. Steps will be taken aimed at restoring the balance between the various levels of government. Progress may be slow—measured in inches and feet not miles—but we will progress.

Clarity of thought, our own life experiences, the randomness of suffering and enrichment, the perseverance and striving required to earn, save and build assets, our own flaws and the flaws we see in others; the minor and major corruptions which we continually see around us and hear about, should all inform us of the futility of believing in pipedreams. Only when politicians promise hard work and the possibility of modest returns do they have credibility. The Left-liberal superstition is the miracle of the loaves and fishes writ large without the benefit of Jesus Christ.

Keynesian economics fits comfortably in this ideology by providing a way to attenuate recessions. We can spend our way out of them. When the private sector—individuals and companies—think it best to pay down debt, governments, faced already with declining tax revenues and the additional costs of supporting the unemployed, are advised to spend big using taxpayers’ current and future earning. Hence in Australia we have the lavish cash handouts and vast amounts of money spent on school buildings—needed or not. Not going on a spending spree is doing nothing, and this is anathema to those who believe that as a community we have the responsibility to act and we have the power to act. The responsibility falls out of the moral imperative to do something; the power in this case stems from prescripts of Keynesian economics. But it is questionable whether these prescripts are right and whether they would have been supported by Keynes in the way they are served up today.

The way economies work is a complex mystery as they grow almost every year while all those millions of decisions to save, to invest, to produce, to buy and to sell are matched without the aid of a giant computer program. For pedagogical purposes Keynes explained it in aggregate terms. Nothing is lost by this if the complexity underneath is kept in mind in moving from description to prescription. Everything is lost if the complexity underneath is lost sight of.

Keynes said that if aggregate demand (made up of consumer demand, investment demand and government demand) is too low, production will also be too low and we will have unemployment. This is true but unexceptional, because production and demand are two sides of the same coin. What was innovative was the proposition that endogenous forces may not be powerful enough to restore an economy to health once it had fallen into recession; at least for a long time. We can argue about whether Keynes was too pessimistic about the ability of an economy to right itself but his analysis is logically consistent and has stood the test of time and scrutiny. But his analysis provides no definitive prescription as to how to restore an economy to health once it has fallen into recession. It is debatable in fact whether Keynes saw the answer in the simple way it is now conceived: as a matter of boosting government expenditure to make up for any cyclical shortfall in private sector expenditure.

Keynes of the General Theory advocated an intrusive and continuous role for government. He wrote: “I expect to see the State … taking an even greater responsibility for directly organising investment” and “I conclude that the duty of ordering the current volume of investment cannot be safely left in private hands”. He advocated a “socially controlled rate of investment” to avoid the damaging ups and downs of “laissez-faire” capitalism and to counter what he pessimistically saw as a growing gap, as society grew wealthier, between required investment to maintain full employment and profitable investment opportunities. His commentary in the General Theory on what we now call fiscal stimulus was entirely en passant and he was careful to say in commenting on the effect of public expenditure that “we have to assume that there is no offset through decreased investment in other directions”. The concept of crowding out is not therefore some modern construction of conservative economists.

Keynes, it can be argued, underestimated the ability of the capitalist system to continually discover and develop new products that people want to buy—an error of judgment. His followers committed a more grievous error by taking too little account of the complexity of economic affairs in concentrating so much on Keynes’s pedagogical use of aggregates. They developed a mechanistic textbook interpretation of the General Theory which seemingly allows demand and production to be manipulated at will at an aggregate level without reference to the complex set of microeconomic forces that actually drive economies. They thus give comfort to those whose predilection is to believe that we have potential mastery over the ups and downs of economic life.

In particular those who advocate public expenditure to counter recessions have at their disposal only a partial and selective view of what Keynes said. They see Keynes through the mechanistic prism popularised in textbooks rather than the nuanced Keynes worried by the inability of the system, beset as he saw it by under-consumption, declining investment opportunities and at the whim of entrepreneurial expectations, to generate stable full employment; and needing direction from a wise central authority. They simplistically see Keynesian theory as saying production is equal to demand, demand is too low, government expenditure is a component of demand, therefore the answer is to increase government expenditure.

There is no doubt that giving cash handouts, for example, will provide a temporary boost to consumer expenditure. If the government spends on school buildings then the national accounts will reflect that in the short term. At question is whether public spending of this kind will distort the economy away from its complex growth path and make it more difficult for the economy to get back on that growth path by choking capital markets with government debt. Nothing in the General Theory on which the mechanistic Keynesian models are built answers that question. Effectively, it is an empirical question. Unfortunately, the complexity of economic affairs makes it extremely difficult to settle it one way or the other. What can be said is that those advocating expansionary fiscal policy to counter recessions should not be accorded some theoretical authority. Doing nothing on the fiscal front may in fact be the best policy, and theory and reason can be brought to bear to support that view.

Maybe Keynesianism and utopian-like thinking generally will eventually be put aside in the light of experience. But there is no sign this will happen, because experience has a hard time eliminating superstition. No matter how bad things get they would have been worse if we hadn’t done what we did, those who hold to the superstition will say. If that produced bad results it was because of the way it was done; next time we will do it differently and you will see how the benefits flow, they will say.

Religion is a potent antidote to the Left-liberal superstition because it acknowledges that suffering and disadvantage are endemic to human existence. To quote Mrs Thatcher: “As a Christian I am bound to shun Utopias on this earth and to recognise that there is no change in man’s social arrangements which will make him perfectly good and perfectly happy.” But as we know, those who most fervently hold to the superstition, unlike Mrs Thatcher and Sir Thomas More, more often than not eschew religion as mythological, while embracing their own mythology; whatever the evidence, whatever the facts.

Peter Smith has taught economics and was CEO of the Australian Payments Clearing Association. He has a website at www.p2sconsulting.com.au.