Selective Amnesia? The answer is under your feet

Throughout the 19th century the integrity of economics was steadily eroded. Whereas the ‘classical’ founders of the discipline had set their enquiries in the rapidly changing social context of the period and viewed economics as an integral part of the moral sciences, the new breed of ‘neo-classical’ economists had little interest in the real world.

Following in the footsteps of Herbert Spencer, they were determined to apply scientific principles to the social world, whatever the implications. They turned economics into a pseudo-science, and we are still paying the price today.
By the early 1930’s the failure of neo-classical economics was abundantly clear. It was left to John Maynard Keynes to pick up the pieces. As the UK Treasury representative at the Paris Peace Conference, he had seen the writing on the wall and predicted disaster in his 1919 book The Economic Consequences of the Peace, which made his name.
Keynes was fully aware of the shortcomings of neo-classical economics. The neo-classical model predicts that the free market will keep the economy in equilibrium, and that flexibility in wages and prices will ensure full employment. Keynes formulated his ideas in the face of clear evidence to the contrary, pointing out that neither prices nor wages changed easily. This meant that unemployment was a frequently recurring reality. It also meant that the market was unable to price things to ensure efficiency. He therefore argued that where the market mechanism failed, governments should intervene in order to promote full employment.

Land – the ultimate means of production

Keynes had no truck with Say’s Law – one bit of classical thinking that neo-classical economists did, unfortunately, persevere with. Say’s Law states that the production of goods and services necessarily creates its own demand. It might have some merit if the process of production involved paying adequate rewards to labour, and if people were not inclined to save. But Keynes realised that these two conditions rarely apply. He thus argued for government intervention to increase demand through public investment in infrastructure, and that such expenditure should be counter-cyclical: during a downturn public spending should increase to offset the decline in private demand, and during a boom it should be reduced as private enterprise recovered and took up the slack.
Keynes wanted to change economics to address the social problems arising from too slavish an adherence to the policy prescriptions of neo-classical theory. He was aware that many people were excluded from productive involvement in the economy and that society was frequently subject to massive disruption as a result of the business cycle. But like his neo-classical predecessors (and like Karl Marx whose analysis of the struggle between labour and capital also largely disregarded the third factor of production) Keynes continued to ignore the role of land.

‘Every Little Helps’

As economist Brian Hodgkinson points out in his excellent book, A New Model of the Economy, “such an enormously influential book as Keynes’ General Theory of Employment, Interest and Money refers to land briefly four times.” Perhaps we should remember that Keynes came from an upper middle class land-owning family, and played a key role in the management of the estates around Cambridge when he was bursar of King’s College. His legacy lives on in many ways: Last year it was recently reported that Trinity College invested £440 million in land occupied by Tesco stores.
Keynes contribution was nonetheless immense: he gave a much-needed moral boost to the discipline; his awareness of the importance of money and debt distinguished him from his neoclassical predecessors, and his version of economics was far more closely related to events in the real world. But his exclusion of land from economic calculations meant he was unable fully to confront the root causes of endemic poverty and chronic instability, and he was therefore unable offer the world a more permanent solution to the enduring problem of economic exclusion.

- Mark Braund

040

Comments

comments