4 MAY 1985, Page 24

LETTERS Shift to Keynes

Sir: Sam Brittan says the recent book by Peter Jay ('Jay's Guide', 13 April) will 'come as manna from heaven' to econo- mics undergraduates. But he is very ambi- guous as to whether the book will be any help to Mrs Thatcher's first successor (who, according to you, may be David Owen — same issue, p.4).

Apart from an obscure reference to Jay's following a 'common-sense quantity theory approach' (whatever the merits of the so-called quantity theory of money, which are statistically very dubious, they are certainly not those of common sense!), he also says 'it would be a pity if Jay's attack on Thatcherite policies were to polarise reactions . . . [it] is marred by the failure to see the continuity between present policies and those of the Callaghan-Healey govern- ment under which the decisive shift away from postwar Keynesian demand manage- ment took place.' From the wording, and from all we know of Sam's writing, it seems clear we are being told that 'the shift away from Keynes' was definitely a Good Thing.

But, again, both current facts and cur- rent opinion trends suggest just the oppo- site. The view is increasingly held that the Keynesian consensus, having served to support unparalleled world prosperity and growth up to 1970, was undermined not by any weakness of theory, but by a combina- tion of huge economic shocks (the Vietnam

war and the oil crisis), and by failure to come to terms with trade union power (in How to Pay for the War, 1940, Keynes virtually predicted this danger). Not know- ing how to find the solutions, Western society reverted to various forms of econo- mic primitivism, for which 'monetarism' is a good generic term.

The tragedy is that monetarism has confusingly become associated in many people's minds with the approach of a direct attack on union power, which is one of the areas, it appears, where Dr Owen would 'understand what she [Mrs Thatch- ed 'has done' (Spectator, op. cit.). The true reason for the need to reduce trade union power is not as part of an 'anti-Keynesian' thesis, but because a heavily unionised labour market makes it impossible to run a Keynesian economy without an intolerable tendency to inflation.

As evidence of current trends of opin- ion, a recent lecture in London at the Centre for Economic Policy Research by the distinguished American macro- economist, Professor Robert Gordon, sug- gested that the conventional wisdom that much European current unemployment is of a 'non-Keynesian' character may be a statistical myth. Professor Gordon also suggested that the recent but now declining boomlet in the American economy was mainly due to the implicit Keynesian expansionism of the Reagan administra- tion (i.e. resulted from benign effects of the Federal deficit). He suggested that a straight Keynesian expansion might now work in this country, without any increase in inflation. Shortly after, James Meade, Nobel Laureate, gave a talk to the Institute for Economic Affairs (where Sam Brittan was seen to be present) in which he re-affirmed his belief in the basic Keynes- ian theory, and also his conviction that the key problem is the essentially political one of wage restraint.

Robin Marris

Lingard House, Chiswick Mall, London W4