The ideas of economists and political philosophers, both when they are right and when they are wrong are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist.
John Maynard Keynes, the author of these words, knew what he was talking about. Few economists have had a bigger impact on either the way the world is governed or the way we think about economic activity. But it is not enough simply to have the right idea: the times have got to suit them, too.
It is important to remember that The Economic Consequences of the Peace, in which Keynes accurately predicted the impact of the reparations imposed on Germany following World War One, did not have any impact until it was too late. Likewise the ideas that underpinned the General Theory of Employment, Interest and Money, while exerting a powerful intellectual influence in the late 1930s, had to wait until the conclusion of the Second World War to be put into practice.
Eventually, however, the idea that the state has a critical role to play in stabilising economies became the economic orthodoxy in most of the Western world.
Although Keynes was one of the key architects of the Bretton Woods institutions that became such integral parts of the postwar international order, some of his ideas, such as the development of a world currency, never got off the drawing board. American ideas about the basis for the emerging economic regime prevailed—not least because the US government was funding so much post-war international reconstruction. Political, economic and strategic power – not just good ideas – proved decisive.
Having the good fortune to be in the right place at the right geopolitical time was something that eluded Keynes’ great friend and rival, Friedrich Hayek, until late in his life. Significantly, it was not until Hayek’s ideas were championed by two of the most powerful political figures of their era – Ronald Regan and Margaret Thatcher – that what we’ve come to describe as ‘neoliberalism’ began to be taken seriously and influence public policy.
Much the same can be said about Milton Friedman’s theory of monetarism, which briefly came to supplant the Keynesian orthodoxy. Between them, Friedman’s and Hayek’s ideas provided an intellectual rationale for rolling back the state and letting the market rip. Yet whatever else the recent global financial crisis may have done, it served as a powerful reminder that there is still a good deal of mileage in Keynesian ideas and that markets cannot be relied on to regulate themselves.
These debates are not simply of historical interest for two reasons. First, capitalism remains as crisis-prone as it was when another giant in the economic intellectual landscape – Karl Marx – first spelled out its ‘internal contractions’ more than a century ago. He may not have been too good at predicting the course of history, but he and his followers still have something to tell us about the way market economies work.
The second reason the relationship between ideas and events is still so relevant is because economic thinking – outside the cloistered mainstream, at least – continues to evolve. The most tangible recent expression of this possibility is Thomas Piketty’s Capital in the Twenty-first Century, which has generated a timely debate about the management of modern economies.
Piketty has assembled a wealth of persuasive empirical evidence to demonstrate a simple but compelling idea:
When the rate of return on capital exceeds the rate of growth of output and income … capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based.
Put simply, the rich really are getting richer and the poor are getting relatively poorer. The widely observed declining rate of growth in the developed economies – caused in part, at least, by slowing population growth – and the much greater concentration of wealth held by a very small percentage of the population, seem to bear out Piketty’s central claims.
Worryingly, it is not only the ‘developed’ economies that are displaying such traits: China, too, is distinguished by growing levels of inequality and a looming demographic crisis.
The significance of Piketty’s research lies in its exposure of the underlying dynamics of contemporary capitalist economies. Left to their own devices, free market economies look likely to further entrench what do indeed look like normatively and practically unsustainable levels of inequality and – equally importantly, perhaps – opportunity. This is not good economics and it’s potentially fatal for political legitimacy.
The fight over scarce resources has, of course, been at the heart of the relationship between politics and economics for centuries. The rise of the welfare state was one way of addressing such distributional questions and creating a common sense of purpose that made capitalism politically sustainable.
The reality of a commonly shared fate may always have been illusory, but systematically dismantling social welfare nets whilst simultaneously allowing the creation of ever greater private fortunes threatens to undermine that implicit bargain.
Australia has some way to go before it reaches the levels of inequality that have come to distinguish the US. But without a state that is prepared to ‘intervene’ to correct the sort of unsustainable excesses Piketty identifies the direction of travel is increasingly clear. His suggestion that a tax should be imposed on capital rather than labour seems both practical (it won’t kill demand) and equitable (especially where capital is not invested productively).
Piketty is not optimistic about the prospects for his proposed global tax on capital, however. Although he has plainly sparked a useful debate, his pessimism looks all too justified: without powerful political advocates or an existential economic crisis of the sort experienced in the 1930s, such ideas are unlikely to be acted upon.
To judge from the recent budget, Australia is certainly not going to lead the way in developing policies to address structural inequality.
Ironically enough, it has generally been the critics of capitalism that have been its most acute observers. Plutocrats and policymakers alike might do well to read and learn from Monsieur Piketty’s weighty tome: it contains ideas that might keep them in their privileged positions, to say nothing of making life a little more agreeable for the rest of us.