Tony Curzon Price (London, openDemocracy): Darling is going to announce that the budgetary prudence rules of his predecessor---to balance the budget over the cycle, unless the spending is on long term public good investment---don't apply. And he is right. But why does a rule that sounds so sensible have to be thrown out so soon after it was proposed?
The best way to understand Keynes' relationship to classical economics is the one proposed by the Swedish economist Axel Leijonhufvud. In his own classic book, "Keynes and the Classics: Two lectures.",he describes two regimes that the economy can be in: one regime is the classical, in which companies have stocks, households have savings and banks lend---all of these are buffers which allow individual agents to deal with everyday uncertainties. Your shipment of aluminium from Iceland doesn't turn up today at the factory gate---no worry. You run down stocks; you delay delivery; some contingent payments get delayed ... the buffers stop small events cascading out of hand. The second regime is the Keynesian: stocks have been run down, banks do not lend ... the Icelandic shipment does not come ... you cannot produce ... you cannot sell ... you cannot borrow ... you cannot pay your wage bill ... employees cannot pay mortgage or rent ... all because of that single failure. The classical economy is resilient, while the Keynesian economy is brittle---it multiplies the points of failure.
Keynesianism---the micro demand management of the 1960s---applied the prescriptions of the Keynesian economy to a regime of classical stocks and buffers, therefore building inflation. The government borrowing policy rule has to recognise the two regimes: Brown's original is applicable to a classical world.
Are we now in a Keynesian world? There are worrying indications that we are entering one. Look at this post on Naked Capitalism about trade finance:
The reason that spot iron ore prices in India have collapsed - more
than halving in three months, is because Chinese demand has vanished
but it has vanished because of a combination of real demand destruction
and apparent demand destruction caused by the inability to finance
cargoes. Its the same for other bulk commodities, industrial metals,
coal, oil and even food. The slump in global demand for basic materials
is real but it is not as bad as the BDIY would make you believe.
For
now the gap between the real and apparent demand destruction is being
filled by running down stocks. Now this can last for a while both
because stocks were, I believe, generally larger than the market
perceived and because investment stocks of commodities are being
returned to the market and because lower real demand means lower
consumption. But in the end, stocks will become exhausted...
Announcing that government recognises that there are two regimes, and that in the brittle, Keynesian regime government will not apply the rules of the comfy classical regime might yet help to avoid the catastrophic depression.
