The Return of the Primitive
by Phil Armstrong (Association for Heterodox Economics)
The following is an extract from a speech made by Nicholas Kaldor in the House of Lords on 18 March 1981;
“The Economics of the Primitive
The belief that public expenditure must be cut in order to balance the budget, which is clearly held passionately by Mrs Thatcher and her immediate associates, derives from an anthropomorphic conception of economics. Primitive religions are anthropomorphic. They believe in gods which resemble human beings in physical shape and character. Mrs Thatcher’s economics is anthropomorphic, in that she believes in applying to the national economy the same principles and rules of conduct as have been found appropriate to a single individual or family – paying your way, trimming your expenditure to fit your earnings, avoiding living beyond your means and avoiding getting into debt. These are all well-worn principles of prudent conduct for an individual, but when applied as policy prescriptions to national economy they lead to absurdities.
If an individual cuts his expenditure he will not thereby reduce his income. However, if a Government cut their public expenditure in relation to tax rates and charges, they will reduce the total spending in the economy and hence the level of production and income. It will reduce the revenue yielded by existing taxes and it will cause public expenditure on unemployment benefit and on the support of firms in trouble and other similar items to rise. It is a policy that is appropriate only in times of excess demand and over-full employment, as was the case in the period of Crippsian austerity after the war. At a time like now, with 2½ million unemployed, far from being a recipe for prudent housekeeping and future prosperity it is a recipe for ruin. To keep on tightening the budget in the hope of ‘balancing the books’ is to keep reducing the output and income of the nation and hence to fail to balance the books as tax yields shrink and expenditures to support the disintegrating economy increase.”
More than thirty years later, we need to remind ourselves of the powerful wisdom of these words. The financial crisis showed the vulnerability of the economy and the need for government intervention in times of crisis. Lord Skidelsky has reminded us of Lucas’ joke ‘I guess we are all Keynesians in the foxhole’. The trouble is we are still in the foxhole and belief in unfettered markets took us there.
Neo-liberals have surely embraced “primitive economics”, putting financial ratios at the forefront of their objectives. The idea of setting out targets for public sector deficits and debt ratios is primitive thinking par excellence and deeply disturbing for those capable of sober economic analysis. Our over-reliance on the City and finance made us very vulnerable to the crash of 2007. Even so, our public debt to GDP ratio is much smaller now than it was in the period from 1945 to the mid-1960s and sustained growth naturally reduces it. The British government ran up debts to fight Hitler, now it needs to do the same to promote growth. The government should worry about returning to full employment and allow the deficit to settle where it may. The size of its deficit is merely a reflection of private sector net saving desires and largely outside the control of the government. The existence of significant unemployment is de facto evidence that the deficit is too small, not too big. The deficit needs to be large enough to match non-government sector net saving desires at the full employment level of income. The deficit would only be too big if it was generating excess demand at full employment and driving up the price level. We are a very long way from this situation.
Perhaps the most worrying aspect of the current situation is the vice-like grip that primitive economics seems to have on our politicians. In vain, we look for those who might understand and accept Kaldor’s words and move beyond this anthropomorphic vision.