Robert Skidelsky

The End of the Keynesian Era

Keynes overestimated the possibility of rational economic management by democratic government. Hayek thought Keynesian government would be too strong for democratic health. It has turned out to be too weak—too much penetrated by, dependent on, or at the mercy of, outside forces to be able to make its economic will prevail. This 'overloading,' to use the current jargon, threatens democracy by saddling democratic governments with a cumulative burden of failure.

Keynes's own political expectations emerge quite clearly in the debate on the gold standard in the 1920s. According to the Cunliffe Report, the great merit of the pre-1914 gold standard was that it was politician-proof. Only when gold reserves went up could the note issue be expanded; when they went down, words, imposed an automatic check on any inflationary increase in the money supply. When Keynes advocated, in its place, a 'managed' currency, the Treasury asked him pertinently how we would prevent inflation. His answer, in effect, was: by the exercise of responsible intelligence. Sir Roy Harrod rightly remarks that 'Keynes...deemed England a sufficiently mature country for it to be possible to assume that the authorities...would not indulge in an orgy of feckless note issues'. But an alternative hypothesis was possible and, as it has turned out, more realistic; which is that, once economic life became a matter for continuous political decision, economic rationality (however defined) would be subordinated to political demands through the auction for votes of a competitive political system. As early as 1931, the May Committee, more famous for its many stupidities than for its occasional nuggets of sense, noted realistically that universal suffrage and rising expectations had 'heavily loaded the dice in favour of expenditure' as the 'disappointment of many hopes in the economic sphere' intensified demands for 'improvement from political action.' The view that Keynesian government has lost control over economic policy seems closer to experience than the view popular in some quarters that government could control the money supply if it wanted to. If that is so, why has it not done so? As long as Sir Keith Joseph (for example) continues to believe that since the war 'governments in this country have had unprecedented power over economic life,' he will be unable to answer this question. Responsibility yes; power no.