• Breaking the Shackles of Neo-Liberal Orthodoxy

    Labour leaders have often been eloquent in articulating a vision of the kind of society they want; it is explaining how that vision is to be realised that seems to be the problem.

    We have seen a further demonstration of this sad truth at this year’s Labour conference. Ed Miliband had good things to say about Labour’s goals, but Ed Balls made it clear that those goals would have to be achieved within the constraints of the current neo-classical orthodoxy.

    The subordination of lofty aspirations to the harsh and supposedly inexorable dictates of “free-market” economics has a long and sad history in Labour politics. Harold Wilson, for example, destroyed the chances of his 1960s government with his long and ultimately fruitless battle against devaluing the pound.

    Jim Callaghan signalled his acceptance that Keynesian economics had run their course when he told the 1976 Labour conference that “you can’t spend your way out of recession”.

    The New Labour governments at the turn of the century, of course, had no need to undergo a Damascene conversion. They readily embraced the “free-market” orthodoxy and set about trying to produce a better society on the basis that the filthier the rich, the bigger the crumbs from their table would be.

    Ed Balls has placed himself firmly in that tradition by asserting that a new Labour government would allow no let-up in austerity and no resiling from the restraint of public spending. Any progress, it seems, would have to come from re-shuffling the pack, not from cutting a new one.

    The commitment to continued austerity is inevitably and correctly seen as validating, of course, the main plank in the Tory platform, and therefore immediately gives rise to the question – why should the voters trust Labour to carry it out when the Tories are available to do it with considerably more conviction?

    If the voters did accept Labour’s commitment to maintain austerity, how – they might ask – could Labour promise with any credibility, in an unchanged macro-economic context, to produce different and better economic outcomes? And if Labour were to win power on that basis, why would they want to enter government in a straitjacket of their opponents’ making?

    The acceptance by Labour leaders that reducing the government deficit must be the top priority seems explicable only on the basis of either a complete loss of political nerve or a total failure to understand how more successful economies operate.

    Austerity policies, as the record shows, are an extremely ineffective way of bringing the deficit down. By reducing the size of the economy, they will inevitably diminish tax revenues, which means that the deficit is therefore bigger than it would otherwise be, both absolutely and as a proportion of a slower-growing GDP.

    Further, with low investment in the domestic economy, so that the borrowing and lending of the household and corporate sectors roughly balance each other out, and with no action to address our lack of competitiveness, the consequent foreign payments deficit (and the borrowing from abroad that it necessitates) has to be roughly matched – as an accounting inevitability – by a government deficit.

    Cutting public spending, in other words, is beside the point and largely self-defeating as a means of reducing the deficit – even if that is treated as the primary goal of policy. If we really want to get the deficit down, there is no option but to get the economy moving again, not on the basis of an unsustainable asset inflation and brief consumption boom, but of improved levels of investment, competitiveness, and trading performance.

    How is that to be done? A complete alternative strategy cannot set out in a couple of hundred words here, but it is certainly not to be helped by reducing government spending. In any case, why do we single out government spending as so dangerous to stability and prudent management, when we look at what happens elsewhere in the economy?

    In the real economy (and not that of fevered right-wing imaginations), 97% of our money comes into existence as credit created out of nothing by the banks. That credit is created by the stroke of a computer entry; it rests on nothing other than the banks’ willingness to lend – especially, of course, on house purchase, hence the asset inflation in the housing market.

    No one seems to turn a hair at the fact that the money supply is almost totally accounted for by credit created by private companies whose sole purpose is making profits for their shareholders. On the other hand, a government that created credit for public purposes and the good of the economy as a whole (or, as the pejorative term would have It, “printed money”) would be lambasted.

    Government-created money is acceptable, it seems, only when – you’ve guessed it – irresponsible lending means that the banks have to be bailed out.   Then, the Bank of England will issue up to £350 billion of “quantitative easing” (equally the product of the “printing press” and, incidentally, having no appreciable inflationary consequences).

    If vast amounts of money can be created for private purposes, why is it so outrageous that a government serving the public interest might create money for investment, say, in new productive capacity? That, after all, is exactly what the newly dominant economies of the Pacific Rim – China, Korea, Taiwan, and others – have done and are doing, and exactly what Shinzo Abe in Japan has returned to, after two decades of stagnation while his country applied policies recommended to them by western economists – those same economists who apparently still have Ed Balls in thrall.

    Isn’t it time the Labour leadership shook off the shackles of a failed orthodoxy and learnt to think for themselves? They might then identify the means that would enable those desirable ends to be met.

    Bryan Gould

    25 September 2014




  • If the Poor Are Worse Off, We’re All Worse Off

    The Herald-DigiPoll last week cast an interesting light on the political debate as the election season approaches.  The poll showed that no fewer than 74% of New Zealanders thought that inequality had widened over the past six years – that, in other words, the rich had got richer and the poor comparatively poorer.

    On the face of it, this would seem to be good news for those trying to replace the current government with one that, it is presumably hoped, would have more of a social conscience.  And the poll comes, of course, on top of the rising tide of concern about the increasingly manifest impact of poverty on so many of our young children – an impact that blights prospects and stunts lives.

    It is certainly reassuring that Kiwis have not lost their traditional concern for the disadvantaged in our society.  Whereas in some other western countries, the fact of poverty is simply denied or ignored, the polling shows that, in our country at least, inequality and its corollary – poverty, have registered in people’s minds as issues that warrant attention.

    Yet the polls on voter intentions continue to show substantial support for the current government.  What this quite clearly tells us is that, while the reality of inequality is recognised, it is not rated by many voters as important enough to determine the way they vote.

    Inequality and poverty are, in other words, to be noted but need not be addressed.  As long as it does not impact directly on people’s own lives, it can be treated as someone else’s problem.  When it comes to polling day, the salience of inequality as an issue will have dropped well down the list, way behind the more pressing immediate problems of managing one’s own budget and prospects.

    We get an insight into this kind of thinking from the Herald’s own poll of its readers following the publication of the Herald-DigiPoll.  What the poll showed was that, while many respondents were concerned about widening inequality, many others were less concerned and just over a third were prepared to accept it as the necessary price to be paid for economic success.

    The notion that inequality and economic success go hand in hand is, of course, well entrenched in the minds of those who embrace the modern doctrine that the market is infallible and must not be challenged; and it is a safe assumption that echoes of this view explain why, even for those who acknowledge the personal and social cost of poverty and inequality on both individuals and society, the need to do something about it tends to dim as polling day approaches.

    Yet there is actually no evidence to support a belief that is cherished by so many.  International comparisons of advanced western economies show conclusively that widening inequality is in no sense a corollary, let alone a pre-condition, of improved economic performance.  Indeed, the opposite is the case.

    The statistical evidence shows that countries with lower levels of inequality – such as the Scandinavian countries and Germany – have performed better than those countries, such as the UK, the US and, sadly, New Zealand, where high and widening levels of inequality have accompanied relatively poor economic performance over recent decades.

    This compelling evidence should come as no surprise.  A wide gap between rich and poor in an economy is inimical to economic success for reasons that apply at both ends of the scale.

    If wealth is concentrated in a few hands at the top end of the scale, the result is a significant degree of economic inefficiency.  The evidence shows that the rich have a greater propensity to “hoard” – that is to accumulate large cash reserves which remain unspent for long periods of time.  They are therefore not available to stimulate activity in the rest of the economy and the Keynesian multiplier effect is thereby much reduced.  And when they do spend, it is often on arbitrary and capricious purposes that do little for economic activity as a whole.  “Trickle down” is not supported by any evidence.

    At the other end of the scale, there is nothing economically efficient about depriving the economy of the productive capacity of a large chunk of the population.  Can it possibly make economic sense to relegate those potentially productive people to unemployment and minimum wages when they could be both working and spending to the benefit of the economy as a whole?

    Can it make sense to consign them to a future where poor education, skills and health – all consequences of poverty – mean that their productive contribution is limited for no good reason and they are more likely to become burdens rather than contributors?

    The conclusions are clear.  If the poor are worse off, we are all worse off.  Those who lament growing inequality and poverty but reconcile themselves to it on the ground that it is a price worth paying are quite mistaken.  Economic efficiency and greater equality are, together, the hallmarks not only of a successful economy, but of an integrated and happy society that is more at ease with itself.

    Bryan Gould

    3 April 2014



  • Miliband’s Dilemma

    Andrew Rawnsley in last Sunday’s Observer identified, quite correctly, the dilemma facing Labour. On the one hand, the economic arguments indicate more and more strongly that George Osborne has got it wrong and that a new approach is needed; but on the other hand, the political reality is that the voters continue to believe that tough measures are needed and that the Tories are best able to deliver them.

    The dilemma is all too familiar. The left has always struggled to move the economic policy debate beyond the constraints imposed by right-wing orthodoxy. And they have never grappled with the fact that the proposed remedy – that they must conduct the debate as framed by their opponents – means that the dilemma can never be resolved.

    The current dilemma illustrates this well. The Tory insistence that austerity and cuts are the only issue that matters has convinced a large part of the electorate that any alternative that fails to address this goal cannot be supported. But a Labour readiness to show, for the sake of credibility, that they too are ready to inflict pain will multiply rather than solve their problems.

    The acceptance of the Tory analysis would saddle Labour with immediate and multiple disadvantages. Any criticism of Tory strategy is straightaway rendered ineffectual, because they are reduced to attacking the outcomes rather than the analysis and its conclusions; and if they are then challenged to explain how, in the context of the same analysis, they would produce different outcomes, they have no answer.

    Furthermore, posing as ersatz Tories, committed to making the same “tough choices” but doing so with a sympathetic and regretful expression, is unlikely to persuade voters that they would not be better off with the real thing. And the Tories will in any case, as Andrew Rawnsley points out, play it both ways by casting doubt on the genuineness and reliability of Labour’s commitment.

    So, is there no option other than a capitulation that not only jeopardises Labour’s electoral appeal but also – and more importantly – denies the economy the measures that it really needs?

    My own political experience leads me to recommend a quite different strategy. It would require courage and hard work, but the benefits to Labour’s electoral chances and to the country’s economic prospects would be immense.

    The starting point would require no dramatic rejection of the prevailing public perception of what is required from economic policy. It would accept that a reduction of the government’s deficit is highly desirable, and that vigilance must be exercised in ensuring value for money in public spending, though it would point out that the government’s strategy has meant continuing cuts that seem only to make matters worse.

    It would go on to argue that there are much more effective ways of tackling the deficit, provided that it is no longer treated in isolation but is seen as a part of the overall economic picture – because it is, in many respects, a symptom rather than a cause of our wider and more deep-seated problems.

    Those wider problems – of lost competitiveness, of inadequate liquidity, of a weakened productive base, of high unemployment – will not be resolved by ignoring them (as the Tories are doing), or by weakening the economy still more by further cuts. On the other hand, if we address them constructively, a stronger and more buoyant economy will not only raise employment, investment and living standards, but will in the course of doing so resolve the deficit problem as well.

    There will be many who will quail at the prospect of trying to sell such an approach to a sceptical electorate. But there are good reasons to take courage.

    First, we don’t have to win the argument tomorrow. We could expect an immediate barrage of criticism but we have until election day to build understanding and support for what we propose.

    I recall, in the run-up to the 1992 election, the differing fortunes of two different Labour policy initiatives. The tax policies were held back until the election campaign and were a disaster because, with so little time to get them across, they were easily misrepresented. I released our alternative to the poll tax, on the other hand, (on which subject we had been constantly challenged by the Tories) well before the election, and it was widely accepted by the time polling day came.

    This time, we have the further advantage of being able to work with a significant and continuing shift in expert opinion. From the incoming governor of the Bank of England to leading monetary economists, there is a renewed interest in a different approach. And the successful experience with that approach of leading economies overseas will also strengthen our case.

    These factors may not impact immediately on public opinion but -with hard work on our part – will help enormously to force the Tories to join the debate on our terms.

    Yes, the dilemma is not just economic but inevitably political as well. That means we can end it only through political action. Isn’t that what politicians are for – to build support for what they believe is right?

    Bryan Gould

    1 July 2013

  • The Tories Don’t Know Best

    When Harold Wilson’s incoming Labour government prepared itself in 1964 to make good the damage done by “thirteen wasted years” of Tory government, its fate was sealed even as it took office. Fearful of fulfilling a Tory stereotype, the decision was immediately taken to resist a long overdue devaluation of the pound. There followed three years of struggle before yielding to the inevitable; the 1967 devaluation was represented as a defeat, and led inexorably to the loss of the 1970 election.

    Labour and the left have always been reluctant to challenge the economic orthodoxy promoted by their opponents and, as a result, have implicitly conceded that the Tories know best – a judgment not surprisingly endorsed, in the absence of arguments to the contrary, by public opinion.

    We are at it again. Labour is again advised by its friends that, if we are to win the next election, we must demonstrate that we are ready to perpetuate Tory mistakes by taking the “tough” decisions – for which read imposing yet more cuts and austerity. Anything less, we are assured, will show that we are not ready for government.

    So, the search is on to identify the cuts that will show that we too are ready to inflict more pain. But to undertake that search is to disable ourselves from making an effective critique of a Tory economic failure that we seem implicitly to endorse, and to condemn an incoming Labour government to implementing a policy forced upon us by our defeated opponents.

    Surely though, as the country’s problems deepen, the decisive action that the voters crave may not be “tough” action that piles on yet more misery, but a clear break from the nostrums that have dominated policy for more than thirty years. Labour’s best chance lies in changing the rules of the game and looking at our problems through a lens that rejects the priorities imposed by a discredited neo-liberal orthodoxy.

    We don’t need to look far for the broad outlines and central themes of a clear alternative. The first requirement is to ask the right questions so that our real problems are accurately identified. For example, why do we not seek the growth that, by definition, is essential if we are to escape recession, reduce the government deficit and restore full employment? Because we dare not. And why is that? Because we know that a dash for growth, in light of the parlous state and long-term lack of competitiveness of our productive sector, would immediately be stymied by rising inflation and a worsening trade deficit.

    Retrenchment can only compound these problems. If we are to escape the dilemma, it is essential that we address the real obstacles to a growth strategy – the need to rebuild our productive base, in the face of a massive loss of competitiveness and an apparent shortage of liquidity and capital for investment.

    In the last three decades, while the rest of the world – China, India, Korea, Brazil, and many others – have become more efficient and competitive as manufacturing economies, we have literally paid no attention to our own declining competitiveness. We have thereby turned our backs on manufacturing, and its unmatched ability to create jobs, stimulate innovation, produce an immediate return on investment and encourage new skills; we decided instead to stake our future on the fool’s gold produced by a financial services industry that – even at best – produced benefits for only a tiny minority.

    But, it may be asked, even if we were now to pay attention to improving competitiveness and to understand the vital role of the exchange rate in that undertaking, won’t rebuilding our manufacturing industry cost us money we don’t have? No. As Keynes said, “there are no intrinsic reasons for a scarcity of capital”. There is no shortage of money; it is simply going to the wrong places. The creation of credit by the banks – by far the most important (and virtually unrestrained) element in the growth of the money supply – goes mainly to house purchase; the “quantitative easing” by the Bank of England has gone straight into the banks’ balance sheets. These major sources of new money are cost-free but are not devoted to productive purposes.

    We have allowed self-interested bankers to persuade us, in the name of monetarism, that growth in the money supply is a dangerous phenomenon that must always be restricted for fear of inflation; but more successful economies have understood that credit creation directed to productive investment in accordance with an agreed industrial strategy – as the Chinese and Japanese are currently doing – will not be inflationary when it stimulates increased output.

    A focus on competitiveness and on ensuring an ample supply of investment capital for productive purposes means that our successful competitors can make full use of their productive capacity. We, on the other hand, are happy to tolerate a high rate of unemployment, with all that means for lost productive capacity and social dislocation.

    A Labour commitment to make full employment the central goal of policy – a goal for which responsibility could not be shuffled off on to unaccountable bankers but would be the issue by which a Labour government wished to be judged – would be welcomed as a decisive break with the neo-liberal era. Full employment, after all, is the hallmark of a properly functioning economy; there is nothing economically efficient about keeping people out of work.

    The fainthearted should be reassured. This approach to economic policy is tried and tested; it has been successfully deployed by other more successful economies over a long period. It is just that we have been too arrogant to notice.

    Bryan Gould

    29 May 2013

    This article was published in Comment Is Free, The Guardian, on 30 May

  • An Economic Policy for a Post-Neo-Liberal World

    Alert: this article is 5000 words long


    Economic Policy Is Not A “No-Go” Area

    The global financial crisis, when it broke in 2008, seemed likely to mark a conclusive end to the neo-liberal hegemony that had dominated world politics and the global economy for more than three decades. Yet, to the consternation of those who were ready to welcome such a denouement, the immediate reaction of popular opinion in many western countries was to “hold on to nurse”; ordinary voters sought refuge in what they knew – or had been taught to believe.

    It is only gradually – and recently – that faith in the hitherto prevailing orthodoxies has begun to weaken. There is now quite discernibly a flagging confidence in the infallible and self-correcting market, in the rationale that tries to justify huge rewards for a tiny minority, in the trustworthiness of bankers, and even in austerity as the correct response to recession.

    As a consequence, “the left” is gradually rediscovering its intellectual self-confidence, and beginning to look to a post-neo-liberal world; the timidity of New Labour is being replaced by an increased readiness to engage afresh in the battle of ideas. But while all kinds of ideas are being either revived or newly developed, and there is a renewed emphasis on and confidence in the role of social and environmental policy, there remains one hugely significant “no-go” area. There is a striking unwillingness to tackle the central issues of economic policy.

    It was significant, for example, that, in the seven issues that Tony Blair, in his New Statesman article, advised Ed Miliband to focus on, there was no mention of the state of the economy. We should not perhaps be surprised, since Tony never had much interest in or knowledge of economic policy – and he is not, of course, alone among leading left politicians in disavowing any interest in economic affairs. The sad truth is that most have simply assumed, like Tony, that economics is a difficult and technical business that can safely be left to the bankers, and is therefore no longer their responsibility.

    They tell themselves that the economic process is probably immutable anyway, and that the real business of politics is in any case about other easier and more emotive issues. Most are content to accept advice from supposed experts, which usually means that they have no option but to go along with whatever may be the prevailing orthodoxy. Even a Gordon Brown – who was widely thought for a time to be a master of economic policy – can now be seen to have been merely a prisoner of his orthodox advisers.

    The dead hand of long-established orthodoxy continues to weigh down on the current Labour leadership. Even Eds Miliband and Balls, who clearly have some understanding of what is needed, find themselves constrained by the fear that anything too overt by way of new thinking will open them up to damaging attack. They have to move cautiously; and that inhibits them from developing and advancing a fully comprehensive and coherent alternative policy.

    Yet the issue of how the economy should be run, and in whose interests, is surely the central issue in democratic politics. Advances in approach and policy on other issues will count for little if the central tenets of neo-liberalism are allowed to remain dominant in the way our economy is run. If the left wants to engage in meaningful debate on the questions that truly matter and to make a real bid for power, it cannot avoid the essential features of economic policy , and it cannot expect to carry the day just by taking occasional potshots at George Osborne. That is too easily deflected with the demand “what would you do?”; and if the answers are merely occasional hostages to fortune offered up without being established in a context that is coherent, comprehensive and compelling, then that whole, centrally important territory is necessarily conceded.

    What would such a context look like? It would have to do more than provide an intellectually convincing critique of neo-liberal orthodoxy, though it might take that as its starting point; it would have to offer a complete alternative strategy that made sense and held together in economic terms and was credibly able to promise better results than what had gone before.

    There should, in my view, be five elements in an economic policy that marked a real change from the failed neo-liberal nostrums. They are a focus on competitiveness, credit creation for productive purposes, an agreed industrial strategy to rebuild the productive base, restoring macro-economy policy as the central responsibility of democratically accountable governments, and, above all, making full employment the central goal of policy. Let us look at each of those in turn.


    The competitiveness of British industry, or lack of it, has of course been the great taboo of our economic policy for decades. It is almost totally ignored and virtually never discussed. Though various indices of competitiveness are maintained, they are never referred to and are apparently regarded as irrelevant to any consideration of the course our economic decision-making should take.

    When Alastair Darling published his 300-page account[i] of his term as Chancellor of the Exchequer, there was not a single reference to competitiveness as an issue or to its concomitant, the exchange rate. As I know from my own experience as a young backbench MP in the 1970s, it was extraordinarily difficult even to table parliamentary questions on the subject of exchange rate policy which was regarded as too sensitive to be discussed.

    Yet a moment’s thought should tell us that, in a post-war world that has seen the rapid industrialisation of new economic powers, including the rise of the world’s second largest economy in a remarkably short time, it would be extraordinary if the UK could simply assume that our place in the competitiveness stakes could remain unchanged without any care or attention being paid to it by our policymakers.

    It is of course not quite true that the issue has not been the subject of intervention; our position on the exchange rate for sterling has always been that any depreciation should be resisted. This has been one of the cardinal, but unstated, features of our economic policy and is one of the most important consequences of allowing the requirements of the financial economy to take precedence over the real economy, and of accepting that monetarism is the only correct basis of a sensible economic policy.

    This distortion of policy has a long and sad history. As long ago as 1925, Winston Churchill famously observed, as Chancellor of the Exchequer, that he would rather see “Finance less proud and Industry more content”. In more recent times, Denis Healey, having exhausted the reserves in defence of sterling in 1976, rejected the IMF advice that monetary policy should be framed in terms of Domestic Credit Expansion (DCE) – an open invitation to grow the economy on the basis of a lower exchange rate and export-led growth – and preferred instead to adopt monetarist orthodoxy and the defence of sterling as the key features of his Chancellorship.

    At that same time, Jim Callaghan as Prime Minister told the Labour Conference that “you can’t spend your way out of recession” – a nonsense then as it is now. What he was really trying to say was that “we dare not try to escape from stagflation by stimulating the economy, because growth would inevitably create insuperable problems of rising inflation and worsening trade deficits.” The problem he was really grappling with, in other words, was not the failure of Keynesian economics, but a catastrophic, though unacknowledged, loss of competitiveness.

    That issue remains at the heart of our economic problems today. Austerity is regarded, at least in government quarters, as our only possible policy option, because it is accepted that to try to grow our way out of recession would be to expose the fact that we no longer have the productive base to allow us to do so.

    The parlous state of that manufacturing base, and the disastrous reliance placed on a financial services sector that – even at best – brought benefits to only a small part of the population, are only the most recent outcomes of a policy that has for decades preferred to avert its gaze from the truth of our situation. A loss of competitiveness will be felt most directly in the highly competitive international markets for mass-produced manufactured goods, and that has been exactly our experience. This resolute refusal to address the issue of competitiveness is in marked contrast to the policies pursued by other, more successful economies.

    Those economies that have grown rapidly over recent decades have taken a quite different approach. The new economic giants of Asia, for example, have focused on trying to hold down their exchange rates so as to maintain the competitive advantage that rapid industrialisation – with its consequent economies of scale, quick returns on investment, and high profits to be re-invested – is able to produce. China, in particular, has clearly recognised the importance of holding down the value of the renminbi over the whole period of its rapid growth, while Japan, intent on kick-starting a sluggish economy, is taking decisive action to bring down the value of the yen.

    An economy like Singapore, with an economic performance to its credit that puts us to shame, has quite specifically focused on competitiveness as the central indicator of the efficacy of its policies. And Germany, Europe’s most successful economy and exporter, pays constant attention to competitiveness indices, such as unit costs in manufacturing, export prices and measures of productivity growth.

    Despite this persuasive evidence that other more successful economies may know something we don’t, we choose to pay the issue no attention. We have been brought up for generations in the belief that manipulating the currency (other than upwards) is somehow morally shameful and – in accordance with all good morality tales – will in the end do no good. It is an article of faith – never examined in the light of actual evidence – that a devaluation will quickly be eroded by inflation and will make little difference to economic performance.

    My co-author on an earlier occasion[ii], John Mills, has however recently examined the statistical evidence in respect of twenty devaluations in different countries and at different times.[iii] He is able conclusively to disprove the contentions that devaluation is negated by inflation and that it does not help living standards to rise. It should come as no surprise to most people, and especially to those who recognise the market’s alacrity in responding to stimuli, that reducing prices in the international marketplace will stimulate sales, and that increased sales and profitability will produce greater investment and employment to the advantage of the economy as a whole.

    But, it may be objected, if the exchange rate is so important, surely the recent depreciation of sterling should have stimulated the economy? Yet we are still bumping along at a couple of percentage points below the 2008 GDP peak. Does this not show that devaluation is not a panacea and cannot be relied on to change our fortunes?

    Let us first make the point that the depreciation of recent times is typical of our experience of devaluation; it has been an ex post facto response to an increasingly intolerable loss of competitiveness, and is the minimum required just to keep us in business. It is far from a considered attempt to achieve a desired level of competitiveness of the kind that our successful competitors take for granted as the sine qua non for export success.

    But let us also concede that a competitive exchange rate is a necessary but not sufficient condition for export-led growth. Without it, nothing else will be effective to bring recession to an end and to make up the ground we have lost. But with it, there is then good reason to look to other measures that would at least then have a good chance of working.

    Credit Creation for Productive Investment

    The most important of such measures is my second major issue – the provision of sufficient credit for investment purposes. We have grown so accustomed, after nearly four decades of monetarism, to regarding control of the money supply as an essential weapon in the battle against inflation, that we have lost sight of its true significance. The monetarist approach takes a narrowly focused, backward-looking and static view of the economy; it treats monetary policy as though it were a minefield, and any growth in the money supply as a dangerous beast that must be kept strictly muzzled and leashed.

    The consequence is that monetarism has become a recipe for slow growth and high unemployment. It allows little account to be taken of the potential for a market economy to grow – surprisingly, since the proponents of monetarism are the most committed self-proclaimed supporters of the “free” market. As soon as there is any sign of growth, an almost superstitious fear of inflation (which is almost always code for a rise in wage levels) dictates that demand must be choked off and job growth restrained.

    The only mechanism available to undertake the task of controlling the money supply is the manipulation of interest rates, so that, in addition to the intrinsically anti-growth stance dictated by the policy, the cost of borrowing for investment is forced up and becomes a further barrier to improved competitiveness. Higher interest rates, and the consequently high exchange rate, are a poorly focused and slow-acting counter-inflationary instrument that produce a good deal of collateral damage while addressing a problem that in recessionary times is hardly the top priority. The limitations of interest rates as a tool of macro-economic policy can be clearly seen in the unsuccessful current attempt to use lower interest rates as a stimulus to an economy mired in recession; without help from other elements of policy, bringing down interest rates is, as Keynes observed, like pushing on a piece of string.

    The preoccupations of monetarist policy with restraint and fighting inflation are all the more remarkable when we consider what really happens in the real world beyond monetarist theory. In this world, there is little concern about monetary growth and no attempt to restrain it. The size of and growth in the supply of money is almost entirely within the control of the commercial banks. Their interest is to lend as much as possible, and they do so, constrained only by their own need for security if irresponsible lending goes wrong, and totally unconcerned about the effect any growth in the money supply might have on the economy as a whole. No one else seems to notice this, let alone do anything to restrain it.

    The consequence is that, in an economy that is in principle run on the basis of strict control over the money supply, there is virtually a private sector free-for-all. Bank lending (or, as we should say, bank credit creation) accounts for by far the overwhelming proportion of money and monetary growth in the economy and – significantly – is mainly devoted to lending secured by property, which means in most cases, residential properties which are the most reliable and easily realised form of security. This is not only damaging in itself, not least in the stimulus it provides to inflation, but it also diverts investment capital away from productive purposes.

    These barely recognised characteristics of what passes for macro-economic policy are in marked contrast to the approach taken at other times and in other countries. We have focused for so long on restraint and protecting the value of existing assets rather than creating new wealth that we are simply unfamiliar with the thinking that has enabled other economies to use monetary policy and credit creation for productive purposes as essential elements in boosting economic performance.

    History provides compelling evidence to support Keynes’ pre-war contention that “there are no intrinsic reasons for the scarcity of capital.”[iv] Two of the most striking instances of how credit creation was used, not to inflate the property market for private profit, but to stimulate rapid industrial growth, were the United States at the outbreak of the Second World War, when Roosevelt used the two years before Pearl Harbour to provide virtually unlimited capital to American industry so that the country could rapidly multiply its military capability, and Japan in the 1960s and 1970s, when Japanese industry was enabled by similar means to grow at a rapid rate so as to dominate the world market for mass-produced manufactured goods.

    More recently, China has used similar techniques to finance the rapid expansion of Chinese manufacturing. The Chinese central bank, under instructions from the government, makes credit available to Chinese enterprises that can demonstrate their ability to comply with the government’s economic priorities. This is admittedly, in principle at least, easier to bring about in a totalitarian regime than in the UK, but in practice there is nothing to stop the government from requiring the Bank of England to create credit (at no cost) for specific purposes.

    Indeed, the Bank of England has already undertaken quantitative easing on a significant scale. The difference between that exercise and what is now required is that the quantitative easing so far undertaken has been used for the purpose of shoring up the banks’ balance sheets, whereas an effective creation of credit for investment purposes would be applied directly to the strengthening of our productive base.

    The rationale underpinning this strategy is a simple one. Whereas a sudden expansion in the money supply would, according to monetarist theory, feed directly into increased inflation, that would be true only when the economy is already fully utilising its productive capacity. As we have seen, it is all too easy to assume, and it usually is assumed by monetarist theorists, that there are strict limits to that capacity – an assumption that is all too likely to be validated by the anti-growth bias of monetarist policy – and, again as we have seen, it is unfortunately true of an economy that is fundamentally uncompetitive.

    But where an economy is manifestly operating at less than full capacity, there is no point in restricting the money supply – especially in the matter of capital for investment. What is needed in a recession is a lift in demand so that markets at home expand, coupled with an improvement in competitiveness so that exports are encouraged. In these circumstances, a deliberate policy of investment credit creation would bring the double benefit of providing readily available finance to support productive investment and to rebuild a sadly weakened manufacturing base, and at the same time encouraging a fall in the value of sterling as the foreign exchange markets recognised that this was a deliberate aspect of the policy; these are, after all, key features of the strategy now being pursued by Shinzo Abe’s government in Japan and are justified – and largely accepted by Japan’s trading partners – on the basis that everyone will benefit from a more buoyant Japanese economy.

    Monetarist fears that any increase in the money supply will lead straight to an unacceptable inflation have in any case already been disproved by the experience of several countries with quantitative easing, and, on the contrary, is essential if we are to escape from what Paul Krugman calls the “liquidity trap”. It is even less of a threat when the monetary expansion takes the form of capital invested in new productive capacity. As Keynes argued, credit creation for such a purpose will not be inflationary if it results in increased output.

    An Agreed Industrial Strategy

    This means that this second essential element in an effective economic policy is, of course, dependent for its effectiveness on the third element – the development of an agreed industrial strategy. This does not raise problems for a centrally directed economy such as China, nor is it a difficult issue in wartime when the needs are pretty obvious; and, while a country like democratic Japan, with its more structured society, might find that the common good might be more readily accepted as the basis for action than it would be in the West, the greater scope for debate on what shape it might take in peacetime and in a western country like the UK should not mean that it is any more difficult in principle.

    An effective industrial strategy for Britain would require agreement and support from each of government, industry and the banking sector. But the task is not an impossible one; the urgency of what is required should surely concentrate minds. The strategy need not “pick winners” in detail or operate in too prescriptive a manner but would establish criteria and measures of performance that would provide a context within which the normal processes for identifying worthwhile investment opportunities could operate so that a great deal of the decision-making could be left to the usual agencies.

    Proponents of the current orthodoxy will of course argue that to attempt such an exercise would be to usurp what is the proper role of the market. But that is to ignore two obvious factors – the current failure of the market to produce satisfactory outcomes and the successful experience at other times and of other economies with just such a strategy.

    A successful industrial strategy would, of course, focus on manufacturing. It is a competitive manufacturing sector that has underpinned the growth of other economies by providing access to mass markets and economies of scale. It is manufacturing that uniquely provides the stimulus to innovation, the quick return on investment, the development of new skills and the creation of new jobs – all elements in a successful economy that have sadly eluded us over a very long time. It is manufacturing that makes possible the strategy of investment credit creation by offering a sufficient return on that investment in terms of increased output so as to provide the virtuous circle of increased investment leading to increased output and back again to yet greater investment that has served other economies so well.

    Restoring Macro-economic Policy to Democratic Control

    The commitment of government, industry leaders and the banks to the development of such a strategy – encouraging its development, in other words, as the outcome of a wide-ranging consultation so that it thereby gains considerable popular support and understanding -would point the way to a further essential reform which constitutes the fourth element in a successful economic policy – the restoration of macroeconomic policy to its proper place as the responsibility of government.

    The elevation of a supposedly “independent” central bank to the role of unchallengeable arbiter of macro-economic policy was widely applauded when Gordon Brown introduced it and is still virtually never questioned. It can hardly be argued, however, that it has produced successful results; and there is now at least a greater disposition to ask whether bankers are as objective and free from self-interestedness as was thought.

    The evidence is that handing monetary policy over to the tender care of a central bank is simply a reinforcement of the current and increasingly discredited orthodoxy that inflation is the only concern and proper focus of monetary policy and that its treatment is simply a technical matter that is properly the preserve of unaccountable bankers, and is not to be trusted to unreliable politicians. Quite apart from the undemocratic nature of this approach, whereby the most important decisions in economic policy-making are removed from the democratic arena, we have paid a heavy economic price for allowing the bankers’ interest to prevail over the interests of the economy as a whole.

    It is easy to see why the bankers – and the economists who increasingly work for them – should support this. It is less easy to see why the politicians should so readily have accepted it. Yet the answer is fairly clear. It has suited the politicians well to be able to argue that the travails of the economy arise, not by virtue of their mistakes or deficiencies, but as a consequence of inexorable economic forces which must kept in check and marshalled by expert technicians. In this way, our governments have been able to disclaim any responsibility for policies (and their consequences) for which they are ultimately responsible.

    An economic policy that broke the shackles of current orthodoxy would necessarily have to be removed from the exclusive and self-interested control of bankers. It would need to be driven by politicians who saw the need to ensure that the wider interest is carried into policy and is an essential element in setting its direction and gaining for it the necessary support.

    The aim should be to re-establish the full range and purpose of macro-economic policy. It would no longer be a simple matter of tasking the central bank with restraining inflation and then allowing market forces to get on with it. Other important outcomes – full employment, a reasonable and sustainable rate of growth, properly funded public services, and so on – would come back into the reckoning as the legitimate goals of policy. Governments would expect then to be judged on their success or otherwise in achieving those goals of a more broadly based economic policy. The outcome of reviving the public debate about macro-economic policy – a debate that has been in limbo for decades – would be not only a better performing economy and a more integrated society, but also a more vibrant democracy, as voters realised that their views might count after all.

    Full Employment

    As we have seen, an important benefit from a renewed debate about economic policy would be the possibility of replacing ideologically driven preoccupations, such as preserving the value of assets, reducing the size of government, and relying on austerity to escape recession, with goals that more accurately reflect the wider interest and represent a more comprehensive measure of economic success. Prime amongst such goals would be full employment – the fifth element in a more effective economic policy.

    Full employment as the central goal of policy would not only be the most important step that could be taken to relieve poverty and to reverse the destructive growth in inequality; it would also be a huge step towards a more inclusive and therefore more successful economy. There is, after all, nothing economically efficient about keeping large numbers out of work and unwillingly dependent on benefits. Full employment is the hallmark of a properly functioning economy. An economy that was competitive in the sense that it could find profitable markets for its produce, and for which investment capital was available to finance increased production, would be able to use the productive capacity of its total workforce. Conversely, a high or persistent rate of unemployment shows that those conditions do not apply.

    To restore full employment as the central goal of policy and as the measure of that policy’s success would revolutionise the way in which management of the economy is regarded. Once it was accepted that full employment is achievable, the success or otherwise of economic policy would be judged according to a criterion that was easily understood by the public. The value, in both economic and social terms, of the contribution that labour makes to society’s well-being would be newly acknowledged. Full employment would be seen as determining the direction of economic policy but requiring that other aspects of policy should also help towards this desirable outcome. It would be seen as important that the workforce was properly supported, through measures like comprehensive rights at work and appropriate skill training, and that the underlying services that guarantee the health and educational levels of the workforce were raised to a high level. The well-being and effectiveness of that workforce are, after all, our greatest asset.

    This would represent, of course, a significant move away from the current orthodoxy which regards labour as just another production cost, to be kept always as low as possible. That approach may or more likely may not make sense from the viewpoint of the individual business, but it is certainly and literally counter-productive from the viewpoint of the economy as a whole. A change in approach would also run counter to the current, but usually unstated, belief that wage costs are too high and that the key to improving competitiveness is to drive them down – not least by allowing unemployment to remain high.


    These five elements of an economic strategy to replace neo-liberalism would certainly represent a clear break from the orthodoxy that has dominated the world economy for so long. It has the merit of offering a real choice to the voters and enthusing those who are keen for change, without departing in any way from mainstream economics. The overall strategy is recognisably Keynesian and would be supported by that growing group of economists that is now confident that neo-liberalism as an economic doctrine has had its day.

    It allows a coherent critique to be made of an orthodoxy that is manifestly failing, not only in the UK but in Europe and elsewhere – an orthodoxy that uses austerity to drive us deeper into recession and is increasingly defended not on its own merits but by the schoolboy tactic of demanding sight of an alternative. Each of the five elements in my proposed strategy supports the others and helps to create a coherent whole; objections to the relevance or practicality of one element can be met by pointing to the supporting role of the others.

    Most importantly, it means that those who increasingly highlight the failures of neo-liberalism are not denied a political victory by their reluctance to tackle this malign doctrine on the centrally important territory where its deficiencies are most apparent and damaging. An economic strategy built on these elements would not only produce a better economic performance but would commend itself to the electorate as well.

    Bryan Gould

    4 May 2013

    [i] Back from the Brink: 1,000 Days at Number 11, Atlantic Books, 2011

    [ii] Monetarism or Prosperity?, Macmillan 1981

    [iii] Exchange Rate Alignments, Palgrave Macmillan, 2012

    [iv] The General Theory, Book 6, Chapter 24, Section 2, p. 376