Below is my slideshow from the talk:

George Osborne was presumably aiming at himself and his friends, when he vowed “to speak truth to power and wealth” at the Tory party conference this week, but dare he speak economic truth to the rest of us? – simultaneously published on Left Foot Forward >

On the narrowest of bases, he might still claim he spoke “truth” to the weak and powerless when in the House of Commons debate on the economy on August 11th he made this challenge:

“Those who spent the whole of the past year telling us to follow the American example, with yet more fiscal stimulus, need to answer this simple question: why has the US economy grown more slowly than the UK economy so far this year?”

It was a ‘brave’ claim when he made it, and it’s looking even ‘braver’ – and more disingenuous – now.

Following very recent revisions to US and UK data on GDP for the first half of 2011, the position is as follows, broken down into different quarters:

UK growth:

Q1    +0.4%   (revised down from the previous +0.5)

Q2    +0.1%   (revised down from the previous +0.2)

Total: +0.5%

US growth:

Q1   +0.1%

Q2   +0.325% (revised up from 0.25%)

Total: +0.425%

So by the triumphant margin of 0.075%, taking the period in total isolation, Osborne just scrapes home. But this ignores the fact the UK quarter 1 figure of +0.4% followed the disastrous Q4 figure of -0.5%, compared to US Q4 growth of more than +0.5%.

Without this Q4 quirk, his tenuous case would collapse.

For when we compare the US and UK over the last three quarters (including Q4 2010), we find that the US grew by 1%, whilst the UK grew not at all. A difference of one per cent in favour of the US economy.

And over the 12 months to the end of June, i.e. the lifespan of the coalition government, the US rate of growth is likewise 1.0% greater than in the UK (US 1.6%, UK 0.6%).

Taking the last 18 months, we get the following medium-term picture:

US:

2010                        +3.0%

2011 first half         +0.4%

18 months               +3.4%

UK:

2010                        +1.4%

2011 first half         +0.5%

18 months               +1.9%

In other words, the US economy has grown by 1.0% more than the UK over the last 12 months, and 1.5% more over the last 18 months, to end June 2011.

The US has many problems, but it has applied some meaningful, if now fading, stimulus.

So if George Osborne really does wish to speak truth, to power and wealth, and to the rest of us, let him own up – it is simply not true the UK’s austerity-based economy has grown faster than the USA’s. On the contrary, coalition government policies have led us deeper and deeper into the mire of unemployment, bankruptcies and economic stagnation.

“I have just returned from a lecture tour of Australia where I came across the story of the Sydney Diocese and what the Aussies call the GFC – the Global Financial Crisis.

The Sydney Diocese, far from chasing the money-lenders from the temple that is their faith, invited them in, borrowed money against the diocese’s collateral, and used the borrowed money to invest – some would say gamble – on the stock market. When the financial crisis broke in 2008, stock market losses were amplified by the church’s huge borrowings. Archbishop Dr. Peter F. Jensen broke the bad news while addressing the church’s annual Synod in 2010, and according to ABC, said that the synod’s “losses total more than $100 million.”

The Archbishop counselled against recrimination, according to the Sydney Daily Herald (13 October, 2010). “He even took a little of the blame himself: “Looking back, I can now see many of the things I should have done, things I should not have done and even clear moments when I should have spoken up or insisted on different behaviour.”

The crisis of the Sydney Diocese alerts us to the way in which the finance sector has corrupted our most cherished institutions, including the temples of our faith, and how Christians too have fallen prey to their siren calls to borrow for speculation –.

It reminds us that we Christians and people of faith, in the period before the financial crisis “should have spoken up or insisted on different behaviour.”

For too long, we have failed in our duty to condemn the use of interest and money as ‘despotic power’ (to quote the Cambridge sociologist, Geoffrey Ingham) and to protect society from the exploitation of usurers.

Not only do we fail to condemn usury; many of us have forgotten its meaning.

I take it to mean the power of those with money, to exploit those without by charging high rates of interest on loaned money. And given that banks are in charge of the production of money; that banks can create credit or money out of thin air – this has indeed become an awesome and despotic power.

And now it is too late to condemn usurious practices. For today we face the potentially catastrophic consequences of the powers of ‘light touch’ de-regulated finance, used to blow up/inflate a credit bubble – and create vast private debts.

If voters don’t trust Labour with money – it may be because we have taken our eye off the ball – their private debts and the threats that austerity poses to their livelihoods and incomes – and their ability to repay these debts.

Thanks to de-regulation and ‘ulta-light-touch regulation’ by both Conservative and Labour governments, private bankers recklessly over-extended credit from the 70s through to the 00s, and now have vast, often unpayable debts on their balance sheets.

Central bankers and Chancellors stood passively by, as private bankers inflated this immense credit bubble. This was a form of inflation to which they turned a blind eye.

According to the McKinsey Global Institute, this credit bubble generated vast private, not public debts –which now amount to more than four times UK GDP – 469% of GDP.

This mountain of private debt eclipses public sector debt. It is about 6 times the level of public debt.  (See chart below.) And as a key part of this, between 1987 and 2010 the finance sector’s indebtedness has grown by over 400%, standing at over 200% of GDP.  

A large proportion of these private debts will never be repaid – because they exceed income by multiples. If some debts are to be repaid, that will only be out of income gained from employment and profits. But employment is falling, and unemployment rising.

It is this frightening prospect, coupled with rises in energy and commodity prices, that is inducing fear and insecurity in British voters.

And so they have begun deflating and de-leveraging  this vast pool of private debt – and dragging economic activity as they do so.

It is this deflation and de-leveraging which is spooking consumers, bankers and ‘the markets’.  Not the government deficit.

But Labour’s spokespersons appear blissfully unaware of this private debt crisis. Instead our leaders – like the Coalition leaders – focus endlessly on the far less significant public deficit, promising to ‘cut the deficit’ and “conceding there would be cuts” – i.e. more austerity – if a Labour government were to be elected.

Ed Balls’ speech yesterday began to move away from the Coalition’s agenda, with his very welcome proposal for investment in public infrastructure.

But the proposal to cut VAT won’t work, because it is based on the flawed notion that over-indebted consumers want to consume more.

They don’t and they can’t.

Even if consumers were persuaded to open their purses and ignore their debts – most of the gains from consumption would anyway leak away to China – as they did under the weak stimulus introduced by Chancellor Alastair Darling.

So while Ed’s speech was welcome, it sounded very much like a re-run of the timorous, and ecologically dubious Darling stimulus of VAT cuts and ‘cash for clunkers’.

So it is no wonder the electorate are anxious and insecure about Labour’s intentions and its economic credibility.

By insisting that a Labour government will cut spending, and cut the deficit – the party’s spin doctors worsen the anxieties of voters; continue to focus on just one sector, and not on the issues of greatest concern to voters: their debts and the threat of unemployment and loss of income.

Unfortunately this failure to see the bigger picture is mirrored in political debates on the global stage.

Let no one underestimate the economic threats facing Britain and the world today.

As Christine Lagarde of the IMF has tried to warn us, we are threatened with the gravest economic crisis since the great depression.

And as Ed Balls hinted yesterday, this may turn out to be the greatest economic crisis in our history – given the unprecedented global integration of finance, and today’s size of world population.

And don’t let’s underestimate the intelligence of ‘markets’.

The fear – real fear – and volatility in financial markets stem from a growing awareness of the true nature and extent, not of public deficits, but of private bank insolvency and of the utter wrongheadedness of the present policy stance.

By focusing on government deficits, politicians and central bankers are applying the wrong remedy – austerity and measured deficit reduction – to a different problem: the broken private banking system.

By applying policies that slash economic activity, raise unemployment and threaten more corporate bankruptcies; by cutting incomes, ‘austerity’ – as Ed said yesterday –  is adding more defaulters, and more unpayable debts to the already weakened balance sheets of over-extended British and European banks.

And ‘the markets’ can see this, even if politicians and policy-makers cannot.

As the crisis unfolds in horrifying slow-motion, governments on the global political stage are reacting with harsh right-wing policies that punish the innocent, cut the public sector and avoid the bankers.  In Britain, powerful elites are incorporated into ministerial decision-making.

There is more than a whiff of the corporate state.

And the scapegoat both here, and in the Eurozone?  As always: government finances.

But the real cause of this potentially catastrophic economic failure has little to do with government finances. They are merely symptoms of failure.

The real cause of this historically unprecedented crisis is the broken global banking system.

A system that is both morally and financially bankrupt – broken on the back of de-regulated finance.

As a member of the Labour Party since 1973 (one who resigned briefly over the Iraq war) I make this challenge to Ed Miliband and our Party leadership: affirm with clarity and conviction the principle that Labour will never again be captive to bankers, nor be seen to be in the pockets of bankers.

That we will never again be captive to neo-liberal central bankers like Alan Greenspan and private bankers like Fred Goodwin.

That Labour will instead finally begin to focus on the consequences of those neo-liberal policies: a vast mountain of private, individual, household and corporate debt – 469% of Britain’s GDP.

The Labour Party has given Britain some of the greatest governments in our history. But just as in the 1930s, Labour remains in danger of capture by the very technocrats that created and supported the reckless de-regulation of finance.

Senior Labour figures continue to dally with international banking elites; to use the power bestowed on them by Labour members, to leverage personal financial gains. To settle scores and to distort debates through the publication of their memoirs.

As a result Labour’s new leaders can make no effective challenge to the finance sector; have developed no substantial narrative or alternative, no comprehensive resolution to the crisis of private debt; only initiatives, political games and point scoring.

So it is urgent that just as it did in the 1930s, the Labour movement must once again wrest the party from the hands of those who supported and implemented the interests of the finance sector.

To regain credibility with the five million voters it has lost; to win back the commitment of the British people as a whole, Labour must chase the money-lenders from the temple that is our democracy.

And Labour must propose a Plan B. Let me sketch the elements of a Plan B.

First, to avoid plunging the British and global economy into a deeper great depression, there is an urgent necessity for both the orderly re-structuring of debts, and for fiscal stimulus.

Until large proportions of private personal, household and corporate debts are acknowledged as unpayable, and a percentage written down, or written off, in an orderly way – there can be no hope of economic recovery and financial stability.

Until Labour calls for a Jubilee of debt cancellation – recognising that debt cancellation is a form of regulation and discipline that is vital, because it disciplines both lenders and borrowers; and periodically restores balance to their unbalanced relationship – there is little hope of recovery.

Second, because the private sector is so over-indebted; and because the banking system is effectively insolvent, there can be no recovery until government takes the lead and kick-starts economic activity.

This must be done through a programme of sound investment in public works, financed in part by Bank of England operations, and subsequently by the tax multiplier.

The financing of a programme along the lines of the Green New Deal: not just for socially and ecologically essential projects, projects that will enable us to transform our economy away from a dependence on fossil fuels.

Such a programme is also necessary to stimulate private economic activity.

And note friends, that I use the term economic activity here, not growth. We cannot afford limitless, exponential growth – the ecosystem has physical limits, and it is time that Labour acknowledged this simple truth about nature’s boundaries – and abandoned the language of ‘growth’.

But we can afford full employment. After all, there is so much to be done. Birds, bees and an ecosystem to be conserved. So many to be cared for, educated; so much creative potential to be unleashed.

And let no one believe we cannot afford to care for our elderly and frail; that we cannot afford to transform our economy away from fossil fuels; that we cannot afford for our artists to give vent to their creativity; that we cannot afford to make music. That we cannot afford to be led out of ignorance; to be educated.

“We can afford what we can do” to quote John Maynard Keynes.

Central banks are eager to supply liquidity to private bankers when they wreck both their own institutions and threaten the global economy; they should now act to supply liquidity to governments that need to stimulate economic recovery, create jobs, and with it the income, savings and tax revenues that will help finance the transformation of the economy away from fossil fuels – and repay debts.

Because, friends, public investment will re-start and create economic activity and jobs, something the over-indebted and fragile private sector cannot do. This in turn will generate the income/savings/tax revenues with which individual, household and corporate debtors can repay debts.

Without sound, extensive government investment in that which is both socially and ecologically useful, there can be little hope of recovery.

Without investment in public works, the public deficit will continue to rise. As sure as night follows day.

Above all, without public investment there will be little hope for a return to solvency by Britain’s banks.

Because of their debts and liabilities, Britain’s bankers, like those in Europe, will soon be knocking at the doors of the Treasury and the Bank of England, demanding even more taxpayer-backed bailouts, quantitative easing and negative rates of interest.

Regrettably, the nationalisation of private losses by further taxpayer bailouts will be inevitable, if we are to avoid systemic failure.

But this time, unlike the Labour’s government’s bailout, there must be tough terms and conditions. Large scale monetary reform.

First: a Jubilee that will result in the cancellation or re-structuring of private debts deemed unpayable. These write-offs to be agreed within a fair and proper process – fair to both debtor and creditor.

Second: an end to speculation by bankers in domestic and global markets.

Third: a range of controls over capital mobility to limit speculation, and strengthen democratic, accountable policy-making and ensure the stability of the domestic economy. Such controls to include a ‘Robin Hood Tax’.

Fourth: the full separation of retail and investment banking as one part of large-scale reform of the domestic banking system.

Fifth, effective regulation of interest rates by the Bank of England. Such reforms to lead to the provision of low-cost loans by the banks to SMEs and other productive and socially useful enterprises at very low rates of interest – for loans across the spectrum, short and long, safe and risky.  Adam Posen’s recent proposal for a public bank that would make cheap loans available to SMEs should be given serious consideration.

In other words, the rule should be ‘tight but cheap’ money.

Sixth: the abolition of bankers’ bonuses.

Seventh: an end to the recognition of Britain’s ten tax havens, and an end to tax evasion and avoidance through the employment of thousands of more trained and motivated tax inspectors.

Labour will only regain economic credibility with Britain’s voters if Labour’s leaders act to displace bankers from their role as the ‘stupid masters of our economy’ (to quote Labour’s 1944 employment manifesto) and once again subordinate finance to the role of servant to the real economy: where jobs and entrepreneurs are created, where socially and ecologically useful and sound activity takes place; where incomes/savings and tax revenues are generated and financial solvency and stability ensured.

For this to happen, Christians in the Labour Party must reassert our core values of social justice, our abhorrence of usury; and challenge once again, the despotic power of finance.

We do that best by chasing the moneylenders from the institutions we cherish most.”

As mayhem breaks out on stock markets; as Eurozone banks freeze up; and as the global financial system approaches a frightening ‘danger zone,’ the champions of the globalised ‘free market’ and of the Euro are in search of a scapegoat.

Instead of accepting that it is the broken banking system; the de-regulated financial Eurozone, and the deflationary monetarist policies of the Maastricht Treaty that are the roots of the crisis, the Troika (the IMF/EU/ECB) want to identify a convenient whipping boy.

Instead of going after the real culprits — un-regulated bankers that lent recklessly, confident they would always be bailed out by taxpayers — the approach of the Troika is to scapegoat Greece. The implication is that the whole fabric of the Euro, and with it the global economy, is torn apart because one poor country, Greece, will not enforce ever-deeper austerity on her people.

Let’s get this straight. The Greek economy — and with it the Euro — is disintegrating because Greek politicians are implementing austerity, not because they are failing to.

As one of the poorest of the Eurozone economies, Greece was always the most vulnerable to the global financial crisis. The ‘Troika’ can build a credible case that Greece’s politicians should not have borrowed from the private bankers of Europe, and therefore Greeks share responsibility for the debt.

But Greece was only able to borrow because, with the help of Goldman Sachs, she was welcomed by Europe’s bankers and leaders into the pre-existing de-regulated, financial framework that is the Eurozone. A monetary union designed above all to promote, protect and subsidise the interests of money-lenders and speculators in the private bank-debt and sovereign debt markets.

Greece’s entry into the Eurozone was of course a mistake. But the idea that Greece has misbehaved to an extent that deems her responsible for destroying the European and global financial fabric is, frankly, absurd.

The fact is Greece and Greece’s debt is a symptom of the crisis, not the cause.

That is why the spectacle of the IMF’s representative Bob Traa hectoring Greeks this week was both hypocritical and spurious.

All unbiased persons of common sense recognise that more austerity — more unemployment, poverty, suicides, family breakdown, civil unrest — will crush Greece. It does not require a PhD from Harvard to work that out. Last year Greece’s GDP declined by 4.4%, according to the IMF. So far this year GDP has plunged by a further 7.3%, according to official statistics.

That is why the IMF’s call for “a reinvigoration of structural reforms” is so profoundly irrational and self-serving.

Who believes that declining economic activity in Greece can save both her economy, the bankrupt European banking system and the Euro?

No sane person can believe that sacking 100,000 civil servants in a single year, increasing taxes on fuel, lowering the tax threshold so that the poorest Greeks pay for this crisis, cutting back on wages and old peoples’ pensions — will a) repay debts b) re-capitalise banks and c) lead to economic recovery.

Instead, these policies will trigger wider social unrest and the inevitable default — sooner rather than later. And a Greek default, accompanied by social upheaval will be contagious, making things much, much worse for Europe as a whole.

So stop whipping Greece.

As we at PRIME have repeatedly pointed out, austerity policies pose a grave threat to a global financial system over-burdened by the debts generated by an out-of-control banking system.

The Troika seem unable to acknowledge that austerity is the wrong remedy for another crisis; the crisis of a bankrupt banking system broken on the back of de-regulated finance.

To address that crisis, the Troika must manage the write-down and write-off of unpayable private and sovereign debts in an orderly manner. This they refuse to do.

Instead their approach is that the private banking system must be protected from losses (and the discipline of the market) — at all costs.

By this approach they are failing the people of Europe, as well as Greece: throwing good money after bad.

It is the failure of the Troika to extend their focus beyond the narrow interests of the private, wealthy banking elite of Europe — and towards the interests of all Europeans — that is causing economic failure.

Above all it is the failure of the Troika to promote policies in Europe that would create and increase employment — in Greece and throughout the Eurozone.

For employment is the only way to raise the income (and tax revenues) needed to repay debts; and to restore the economy and the public finances (of Greece and other countries) to health.

Because the IMF, EU politicians and ECB bankers cannot accept or implement these self-evident remedies, the people of Greece are well advised to go it alone; to default and escape the clutches of politicians and officials determined to strangle all possibility of economic recovery.

Others have gone before — and recovered: Russia in 1998; Argentina in 2001 and Iceland in 2008 — after the biggest banking collapse in economic history.

Greece has only her austerity chains to lose.

While I was in Australia I recorded this interview with ABC’s daily show. This went out on 15th September. Watch it above or on ABC’s website here >

Wall Street plummeted as concerns over European debt and the US economic downturn spurred a broad sell-off. Photograph: Shen Hong/Xinhua Press/Corbis

Read my article from Guardian Cif, Friday 19th August:

As bank shares and stock markets plummet, and investors flock to the safety of government bonds; as obstinate EU leaders crucify their countries in a futile struggle to defend today’s equivalent of the gold standard; as British and American politicians adopt austerity policies and drive their economies closer to the cliffs of depression; and as most professional economists stand aloof from the escalating crisis – what lies ahead for ordinary punters like you and me?

First, let’s take look at the big political picture. This crisis is already sharpening the divide between left and right in both the EU and the United States. Studying a precedent – the implosion of the 1920s credit bubble in 1929 – we note that four years after that crisis erupted, the political divide sharpened decisively. The United States and Britain moved to the left. Germany chose a different path. After 1930, Germany’s Centre party under Chancellor Brüning adopted austerity policies that resulted in cuts in welfare benefits and wages, while credit was tightened. At the same time the German government engaged in wildly excessive borrowing from the liberalised international capital markets. The ground was laid for the rise of fascism.

Four years after the “debtonation” of August 2007, our political classes in both the EU and the US have consciously declined to restrain out-of-control finance sectors or to fix broken, effectively insolvent banks. Instead, central bankers deployed taxpayer-backed resources (quantitative easing) to finance, guarantee and bail out bankers who then went on a wild, speculative spending spree.

At the same time, politicians imposed austerity on the more socially useful and productive sectors of the economy, both public and private. In both the EU and US these economic strategies have angered the populace and emboldened the right; in particular the far right. Looking ahead through the political lenses of austerity, street rioting and Tea Party obstructionism, the signs are ominous.

And then there is the impact on our own living standards. For comparisons and precedent, we need only look at Japan. Our politicians and central bankers have not learned from Japan’s crisis, which preceded our own. We are, therefore, destined to follow Japan’s disastrous record of lost decades of economic activity. As in Japan, so here: a broken banking system, crushed by the weight of unpayable debts on its balance sheet, fails to lend to businesses at affordable rates. Pretty soon this constrains investment. First-time buyers can’t get affordable loans or overdrafts, placing downward pressure on property prices.

A fall in investment is compounded by government policies for austerity – rises in VAT, and cuts in public spending. These policies trigger a rise in unemployment. Rising unemployment causes people to snap their purses shut, placing even further downward pressure on prices, profits, wages and employment. The downward spiral is then hard to arrest.

Property prices across Japan have continued to slide uninterrupted for nearly two decades. Hard though it may be for us to accept, it is not impossible to imagine UK property prices falling for the next two decades.

Just as here, Japan’s politicians and central bankers exaggerated the risks of inflation, reflecting the concerns of bankers and creditors – who fear inflation will erode the value of their outstanding loans. And so they were slow to a) use monetary policy to help the broader economy recover, and b) to restructure banks. The primary Keynesian tools for reversing the Great Depression were an aggressive monetary policy combined with extensive restructuring of the banking system.

While Keynes is largely defined (by his enemies) as a fiscal activist, he was first and foremost a monetary economist. In other words, he believed that if governments and central bankers would only fix the money system – by lowering rates of interest for all borrowers (not just the banks); by injecting QE into productive, socially useful projects; and by restructuring the banking system – the rest of the economy could be helped to recover.

Because our politicians and central bankers have so firmly rejected these lessons, prospects don’t look good for us at all. Instead, we would do well to echo Frank Zappa’s realism: “I mean to say that every day/Is just another rotten mess/And when it’s gonna change, my friend/Is anybody’s guess.”

I appeared on Al Jazeera’s ‘Empire‘ on Thursday evening – hosted by Marwan Bishara, the panel was made up of myself, Dr. Georges Corm (former Lebanese finance minister and former special consultant), World Bank Professor Alex Callinicos (director of European Studies, King’s College London and author of ‘Bonfire Of Illusions’) and Dr Mario Blejer (former governor, Argentine Central Bank and former advisor, Bank Of England).

Click here to watch the hour long special >

“Marwan Bishara asked: will the International Monetary Fund regain its influence and reshape its role?

“The world is undergoing seismic economic changes, from the international financial crisis to the shifting balance of power between developed and developing countries.

“In this new world order the International Monetary Fund (IMF), the most prestigious and powerful international economic organisation on the planet, is reduced to a mere advisor, even spectator.

“This bastion of capitalist ideologies and neo-liberal policies is coming under attack from all sides.

“The developing world accuses the IMF of exploitation and favouritism, and the current scandals have only added to their woes. And the developing world refuses to be treated by the IMF as if was merely developing.

“But in the last three years the global economy has shifted and the old divides between east and west, north and south have become blurred. Many nations are looking at what the fund has to offer and are increasingly saying, “Thanks, but no thanks.”

“The IMF talks about reform, but is it empty rhetoric? Will it or can it change to reflect the new reality?

“And more importantly, with bailouts, defaults and rich nations living in a state of permanent crisis, are the IMF’s free-market policies part of the solution, or just perpetuating the problems?

“Empire asks: do we still need the IMF?”

Watch the show here >

Tonight, Wednesday 3 August 2011 at 08.00pm BST (GMT +1), BBC Radio 4 will broadcast a debate which took place at the London School of Economics (LSE) on 26 July.  This broadcast will be repeated on Saturday, 6 August, at 10.15 p.m BST (GMT +1).

Along with my colleagues Prof. Victoria Chick and Douglas Coe at PRIME  we have written the following response to the debate:

Debaters considered whether Keynes or Hayek had the solution to the present financial crisis. The economist George Selgin and philosopher Jamie Whyte spoke for Hayek; Keynes’s biographer Robert Skidelsky and the economist Duncan Weldon spoke for Keynes.

On the one hand we are pleased that the BBC and the LSE now acknowledge rival positions to the present austerity policies of Western governments. On the other  we are concerned that the debate might have served mainly to reinforce existing prejudices, rather than to clarify the substance of the matters under discussion, matters which – there can be no doubt – are of the most profound importance.

Lord Skidelsky provocatively but justly reminded the audience that in the early 1930s, the same orthodoxy driving western austerity policies directed the actions of Germany’s 1931 Bruning government and paved the way for the rise of Nazism. These actions – vigorously opposed by Keynes – were the final straw for a Germany crushed by defeat and the disastrous boom-bust cycle that followed their return to the gold standard. Reparations were easily circumvented by wildly excessive borrowing from financial interests around the world, in a manner that even Keynes did not anticipate. It was these financial and fiscal policies that brought Hitler to power.

With financial interests still firmly in the ascendency and reactionary right-wing forces increasing their grip in the United States and much of the Western world, we must not forget these lessons from history, which formed the background to the original debate between Keynes and Hayek themselves. The stakes are high indeed.

Keynes shared with Hayek a preference for the economy to be primarily the province of the private sector. However, he recognised that ‘the market’ did not always best serve the common good and therefore that state intervention was necessary – and not just during a slump. In this he was diametrically opposed to Hayek.

For Keynes, the market’s major flaws were rooted in monetary arrangements that favoured speculation and excess consumption rather than productive activity. In addition, in a slump, the pessimistic outlook of producers and investors allowed the slump to persist and needed the stimulus of public works expenditure.

The LSE debate neglected the subtleties of the respective positions of Hayek and Keynes and reinforced many of the most common and most dangerous fallacies about Keynes’s contribution – and even established some new ones.  While both economists were misrepresented to some extent, our main concern must be to rectify distortions about Keynes. There are eight misrepresentations that we want to bring out.

1.   Hayek as “an opponent of financial excess”

From 1971 through the early 1980s, restraints on the financial sector were steadily unwound. These actions were prompted by Hayekian ideals of liberalism, as is well known.  The Hayek supporters at the LSE debate dissociated themselves from this liberalisation, the cause as we now know, of the rapid expansion of the money supply before the crash. Hayek might not have predicted this consequence of liberalisation, but its disastrous consequences are now plain to one and all. Perhaps this is why the debaters dissociated themselves from this aspect of Hayek’s position. Instead they castigated the conduct of the liberalisation policy rather than the policy itself. Indeed the ideal of liberalisation was scarcely mentioned, for to do so would be to acknowledge the existence of an alternative: Keynes’s managed financial system.

2.   Keynesian policy as “promoting the big state”

Keynes’s most substantial legacy was a financial system managed by the state.  This system prevailed from the end of the gold standard until the 1970s. This management ensured that on the one hand low long-term interest rates facilitated both private and public sector investment; on the other, restraints on

banks and capital mobility kept speculation and excessive consumption at bay. Keynes had devised and helped implement a financial system that was conducive to production and investment rather than speculation and consumption.  A larger state rightly prevailed than in the 1920s or 1930s, but ironically Keynes’s state was still smaller than the state that prevailed after the counter-revolution of financial liberalisation

The post-war world was one in which the state and the private sector operated powerfully in tandem, supported by a greatly revised monetary architecture.

As we have stressed, Keynes was concerned mainly with the effective operation of the private economy.

3.   The inflation of the 1970s as “the fault of Keynesian policies”

The inflation of the 1970s began just after the Keynesian post-war mechanisms for the regulation of finance started to be dismantled. In Britain, controls on banking and capital mobility were relaxed, and liberalised arrangements were restored, beginning with Competition and Credit Control (1971) (evaluated as “all competition, no control” by most economists). The root cause of the inflation of the 1970s was the massive expansion of the money supply that followed the deregulation of credit control, as both Friedman’s monetarism and Keynes’sGeneral Theory, Ch. 21, predict.

The inflation of the 1970s was not the consequence of Keynes’s policies but of the dismantling of his policies for restraining the finance sector. In the past, the inflationary 1970s would have been understood as a ‘bankers’ ramp’.

4.   Keynes as “advocate of deficit spending”

While the importance of Keynes’s monetary policies is scarcely recognised, even his fiscal policies are severely misrepresented. Most prominent and pernicious of all is the idea that he advocated deficit spending. From his earliest contributions to the debate on fiscal policy, Keynes was concerned to establish how public works expenditure would pay for itself and would constitute a relief rather than a burden to the public finances. As we have shown in ‘The economic consequences of Mr Osborne’,[i] the outcomes of public expenditure policies over the last century vindicate his analysis. It remains a puzzle why even Keynes’s most ardent champions neglect the evidence.

5.   Keynes as “a supporter of wasteful expenditures”

It was wonderful to be, first of all at such a professionally and well organised event (congrats to Mark Letcher and his team). It was also fantastic to be amongst such an interesting array of speakers including John Gapper ‘the secret gardener’ who has spent the last 35 years propagating wild flowers in Brighton and Hove (watch his talk here) and Alice Ferguson and Amy Rose – two mothers with a simple but brilliant idea to get children playing outside (watch their talk here).

My talk was on how we can afford to finance the Green Transition – watch below:

This morning I joined the Guardian’s panel of Martin Kettle, Len McCluskey and Matthew Oakley to give our verdict on today’s GDP numbers:

Ann Pettifor:

“The Chancellor must eat humble pie”

The statisticians, clutching at straws, blamed the victims – the British people – for the measly 0.2% growth in GDP. It turns out we are too fond of holidaying (the royal wedding effect) and basking in “warm weather”.

But this cannot explain the fall in manufacturing by 0.3% and the 3.2% fall in electricity, gas and water supply. Nor does it explain the rise by 0.7% in “business services and finance”. The fact is the economy remains unbalanced, and the coalition government is doing very little to restore some balance, and with it the potential for recovery.

And without economic recovery, there can be little hope for the public finances. The fact is, the chancellor cannot cut the deficit if the economy does not recover. Today’s numbers offer little succour. GDP is still lower than it was in 2006 – four years after the crisis “debtonated” in August 2007.

The chancellor’s budgetary outcome depends on the plans of the entire economic system and its reactions to the Treasury’s policies. Right now the British economy is responding to the government’s determination not to provide a stimulus to the very weak private sector – by faltering.

The argument is that Britain “cannot afford” a fiscal stimulus. That we “cannot afford” to boost the private and public sectors, create jobs, generate income and restore hope to 2.5 million unemployed people.

But we could, apparently, afford to bail out the banking system.

The coalition government’s determination not to stimulate the creation of employment, and with it the income that will generate recovery – will be viewed negatively not just by the powerful rating agencies, but by the British people too.

The fact is that just as work makes things affordable for individuals, so employment makes recovery affordable for the economy as a whole. And until the chancellor eats humble pie, and absorbs this economic lesson, neither the economy, nor the public finances will recover.

Martin Kettle:

“The chancellor is a weakened figure”

The longer the British economy continues to show no real signs of growth, the weaker George Osborne’s political stock looks. So aQ2 growth figure of 0.2% is clearly bad news for the chancellor’s authority. It could, of course, have been worse, and it very nearly was. A little growth is disproportionately better than no growth at all. But the fact is that growth has fallen over the quarter and has only risen by the same tiny amount of 0.2% since the spending review in the autumn. Osborne will still blame Labour for this underlying weakness, but the passage of time gradually weakens that argument, while Labour can point to the fact that growth was rising when Alastair Darling handed over in May 2010.

This figure puts a lot of pressure on the economy’s ability to reach the 1.7% annual growth forecast over the next six months, and this in turn increases pressure on Osborne to respond with new measures. No chancellor likes to be in this position at any time, and Osborne is particularly at risk from the economy’s negligible pick-up, since his whole strategy is based on the argument that strict fiscal disciplines will aid growth, of which there is no evidence so far. Yet Osborne cannot easily take any of the quick-fix measures – like cutting taxes or interest rates – either. The chancellor is a weakened figure now and his enemies and rivals will scent opportunities.

• Martin Kettle is associate editor of the Guardian

Len McCluskey:

“The price we pay for neo-liberalism”

Set alongside Britain’s moribund economy, Monty Python’s parrot would look like Usain Bolt. The growth figures show our country still stuck in nought-point-something land while other European states, most notably Germany, power ahead.

There are three related reasons for this.

Most immediately, the government’s exclusive reliance on savage public spending cuts are sucking the air out of the economy and depressing demand when a stimulus is clearly needed.

Second, we have allowed our manufacturing base to shrivel while relying over-much on a bloated and now semi-bankrupt financial services sector, for which “growth” still mainly means bigger bonuses. The axe currently hanging over Britain’s last train-building plant in Derby suggests that little has changed in official thinking here.

Third, there is no plan for growth beyond an entirely dogmatic trust in the private sector. The possibilities of, for example, using the state’s stake in major banks to drive investment are simply ignored.

Today’s figures are the price we pay for having a government trying to tackle the crisis of neo-liberal economics with essentially neo-liberal tools. The new thinking needed to build a vibrant 21st century economy which delivers for everyone, not just the elite, most likely requires a new government.

• Len McCluskey is general secretary of Unite

Matthew Oakley:

“It’s about sticking to plan A”

This relatively gloomy GDP data is not unexpected and should not be a cause for panic. However, it does underline that the government needs a more coherent and ambitious approach to growth. This would not mean spending more: the government must stick to its budgetary plans. Not doing so would see us return to an approach based on borrowing and government spending, which we have seen to be unsustainable. Instead it must undertake fundamental reform that focuses on the long term.

Policy Exchange will soon be publishing a report outlining how a new pro-growth approach to planning and urban development could stop central and local government control constricting the growth of our cities and towns, and hindering business development. To back this up, the UK also needs to accelerate reform to its welfare system and to transform transport infrastructure investment to bring in more private sector involvement and improve our creaking networks.

Finally, a clearer approach to industrial policy is needed. This is not about picking winners but about being clear on where growth comes from and where the UK has a comparative advantage. It is then about ensuring that structural reform facilitates growth in these areas and encourages seed funding for innovative businesses, while encouraging robust competition.

Reform in each of these areas would not be about snap decisions based on one or two poor quarters of growth, nor would it be about making headlines with policies that sound good but deliver little. It is about sticking to plan A and backing that up with a greater focus on structural reform that allows the UK to grow now and in the future.

• Matthew Oakley is head of enterprise, growth and social policy at Policy Exchange